On February 9, 2022, the Dutch Authority for the Financial Markets (AFM) published a statement on the impact of payment for order flow (PFOF) on the quality of order execution. The AFM performed a study on the execution quality of PFOF trading platforms. According to the AFM's analysis, PFOF trading platforms structurally offered worse execution prices for retail clients in comparison to other liquid markets.
The statement from the AFM follows a warning from ESMA last summer in which it warned firms and investors for the risks arising from PFOF. In PFOF, a trading platform or market maker pays a fee to a broker to obtain the exclusive right to execute the orders of the broker's clients. According to ESMA, PFOF inappropriately incentivises investment firms to select the party offering the highest payment, rather than the party offering the best possible outcome for clients in executing orders.
AFM's analysis
The AFM examined the quality of two PFOF trading platforms and one non-PFOF trading platform. The initial results of the AFM analysis show that these PFOF trading platforms offered structurally worse execution prices based on a comparison with actual transactions of several other trading platforms.
The AFM’s analysis focused only on Dutch shares, but it has shared the methodology with other regulators in Europe to allow them to perform a similar analysis.
AFM's opinion: EU-wide ban on PFOF needed
PFOF is prohibited in the Netherlands. The AFM is of the opinion that PFOF is an undesirable trading model, as it leads to a lack of cost transparency towards investors and is contrary to the principle of open and competitive markets.
The AFM advocates an EU-wide ban on PFOF as it ensures a level playing field and prevents brokers established in another EU member state to service Dutch investors using PFOF.
