The European market policeman calls on “zero commission” brokers to be vigilant

Posted on Jul 14, 2021 8:36 AM

This is one of the main reasons for the phenomenal success of the Robinhood brokerage app with US stock marketers. And a practice that is also developing on the Old Continent: offering individuals the possibility of playing on the stock market without paying any commission.

The appearance of these new brokerage methods worries Esma. For the European policeman of the financial markets, they could encourage “speculative behavior” on the part of individuals attracted by the promise of free trading. The regulator especially expresses its criticisms of one of the methods of remuneration of these players, without however targeting a particular brokerage company.

Conflict of interest

The recent increase in the number of retail investors buying stocks, mainly in the United States, has highlighted the use of what is known as payment for order flow. or PFOF). In other words, brokers get paid by certain players to direct the orders of their trading clients to their execution platform, explains Esma. Before adding that “even if the phenomenon is less widespread there than across the Atlantic, it is beginning to be observed in Europe. “

What creates a “clear conflict of interest” for the broker, who will tend to choose the partner who will bring him the best remuneration, rather than the one offering the best solution for investors, that is to say the best cost. total of the order, both in terms of the cost of execution and the price of the security. This obligation of “best execution” is moreover one of the key elements of the European MiFID 2 directive, which notably governs market transactions on the Old Continent.

National authorities

Esma therefore calls on brokerage firms to pay particular attention to dealing with these conflicts of interest. And in particular to the fact that the practice of PFOF does not lead to a sale or purchase price less advantageous for stock marketers. The European supervisor has also instructed national authorities, including the AMF in France, to look into the subject by early next year.

The lack of best execution was also one of the criticisms formulated by the SEC, the US regulator, to Robinhood, in the context of the procedure which ended in a fine of 65 million dollars for the broker. . The investigation revealed that “commission-free” transactions were often executed on the basis of a less favorable price than that offered by competitors. The shortfall was often greater than the commission that customers would have paid to another provider.

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