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FINRA and pay for order flow

On Behalf of | Aug 10, 2021 | FINRA |

Traditionally, many brokerage firms in Pennsylvania and around the country worked on commission or fees. When someone placed an order to buy stock, the brokerage added a charge for that action. In recent years, services like Robinhood introduced trading with no additional fees for end-users. What these end users may not know is that at times, some third party is paying the broker. The broker may be paying for overflow or giving orders to another broker to fulfill. Then, they receive payment from that other brokerage.

FINRA notice

FINRA is a private corporation that exists to help the finance industry regulate itself. Along with the SEC, which is a governmental entity, FINRA helps to keep the marketplace fair. In August 2021, FINRA released a notice reminding brokerage firms of their responsibilities to consumers. They are meant to try and find the best terms available for their customers, within reason. In essence, they’re supposed to honor at least some fiduciary duty to consumers.

Payment for order flow can potentially create some conflicts of interest for consumers. That is because these arrangements call for considerations to pass between brokers. Sometimes, these are simply cash fees. But sometimes, they’re rebates, discounts, or credits. Whatever the incentive is, the broker now has an incentive that benefits them and not necessarily the end consumer.

FINRA regulations require that firms consider the consumer first. They should instead be looking for ways to quickly, accurately, and inexpensively execute these transactions. Another issue pointed out by consumer advocates is that pay-for-order flow often isn’t appropriately disclosed or explained to consumers. That means they may not understand why working with fee-for-trade firms may, in some cases, be better for them in the long run when compared to PFOF brokers.

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