Thread by @dlauer

I wrote something about Payment For Order Flow, Price Improvement and high-speed speculators.

tldr; PFOF brokers are not getting best execution, and there's some data to prove it.

urvin.finance/blog/how-is-th…

There are several things going on here. First, the NBBO is a flawed benchmark, one that is being damaged & widened by the very practice of PFOF/internalization.

It’s like marking up a TV by 25% & then giving your customers 1% off and telling them they’re saving a ton of money.

Second, there are often better prices out in the market that the internalizers know about, and I show a trade that looks very much like front-running, albeit at millisecond timescales.

Finally, we explored off-exchange, sub-penny trades and found that by far, many trades only receive the bare minimum 1 mil of price improvement. This looks a lot like juicing the stats to claim that a high % of trades get price improvement despite it being de minimis.

Markets are being harmed by this practice, which is increasing the cost to trade for everyone, including institutional asset managers. Retail is not getting the best possible price through this closed, anti-competitive system with power concentrated in few firms.

In the end, I just completely agree with Citadel. "The practice of PFOF ... should be banned ... Internalization without meaningful price improvement reduces competition, limits price discovery, leads to market fragmentation, and should be banned."

https://twitter.com/dlauer/status/1362470053321523202

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