On 23 April 2019, the FCA published a report on payment for order flow (PFOF). PFOF occurs when an investment firm that sources liquidity and executes orders for clients receives a fee / commission from both the client that originates the order and the counterparty the trade is then executed with.
The FCA’s report provides an update on its recent supervisory work on conflicts of interest and PFOF. The FCA’s work has focused on how firms manage conflicts of interest where they continue to charge a commission from market makers or liquidity providers with respect to eligible counterparty client business.
The key findings of the FCA’s work on PFOF has been:
- nearly all firms have stopped charging liquidity providers when sourcing exclusive liquidity for a specific client, regardless of client classification;
- firms have found it difficult to consistently determine whether their activity legitimately constitutes the broad dissemination of non-exclusive liquidity which may allow them to effectively manage the conflicts of charging both sides of a trade;
- firms could take further steps to improve the systems and controls they use to manage conflicts of interest for specific areas of their businesses; and
- some firms routed client orders to overseas affiliates which charged liquidity providers PFOF.
The FCA will continue to prioritise and monitor firms’ compliance on PFOF as part of its ongoing firm supervision.