The recent influx of retail investors into trading and increasing popularity of trading apps has brought the zero-commission models typically used by these platforms under scrutiny from EU regulators, with the European Commission indicating that it is looking into these business models and asking national regulators to do the same.
The concern is where low or zero commission brokers make their money from routing trades to market makers - a practice known as payment for order flow ('PFOF'). The Commission has stated in a letter to the European Parliament that it is considering whether this business model is consistent with EU market rules under MiFID II, in particular those on conflicts of interest and best execution, given the broker is incentivised to execute client orders with counterparties based on their willingness to pay commissions rather than the client's best interest. It has also indicated it plans to assess whether amendments to the existing MiFID rules appear necessary, taking into account the 'gamification' of retail investing.
Long before recent trends brought the issue back into the spotlight, in the UK, PFOF is a model the Financial Conduct Authority has stated is incompatible with its rules on conflicts of interest, inducements and best execution. As well as conflicts issues, other concerns it has highlighted are that it undermines the transparency and efficiency of the price formation process (by making it more likely extra costs will be passed on to the broker's clients through wider bid-ask spreads from market makers who have to PFOF to attract order flow) and can distort competition (by forcing liquidity providers to use a 'pay-to-play' model, creating barriers to entry and expansion).
“Payment for order flow-arrangements are at odds with some of the basic principles of EU financial market regulation”