ASIC has today released Consultation Paper 347 Proposed amendments to the prohibition on order incentives in the ASIC market integrity rules (CP 347).
ASIC has identified that its rules do not deal with certain payment-for-order-flow scenarios such as arrangements between non-market participant intermediaries and proposes to close this regulatory gap.
Payment for order flow is not prevalent in the Australian equity market, however ASIC has observed continued growth of payment for order flow in other markets (mostly the US). There is also increasing scrutiny of payment for order flow by other regulators.
Payment-for-order-flow arrangements create conflicts of interest that can lead to poor client outcomes. It can also negatively impact market liquidity and pricing. In our view, these harms outweigh the benefits.
ASIC has considered the application of the existing prohibition on payment for order flow in the context of recent developments in Australia and aboard. ASIC seeks feedback on its proposal to amend the current prohibition, which is set out in Part 5.4B of the ASIC Market Integrity Rules (Securities Markets) 2017.
ASIC’s proposed amendments are a proactive measure intended to avoid the emergence of payment for order flow arrangements in Australia.
Next steps
The consultation period will end on 3 November 2021, providing respondents with an extended period in recognition of the pandemic shutdowns in which to respond to ASIC’s proposals.
After receiving submissions on CP 347, ASIC will consider the feedback, publish a feedback report and, if ASIC chooses to proceed, submit the amended rules for Ministerial consent.
Background
Payment for order flow (PFOF) is an arrangement where by one person buys client order flow from another person, in exchange for a payment or other incentive. It is currently prohibited among market participants.
Under Rule 5.4B.1(1) a market participant must not, directly or indirectly, make a cash payment to another person for their order flow, if the cash payment leads to the net cost being less than the value of the reported price for the transaction(s).
The definition of ‘net cost’ (which is set out in Rule 5.4B.1(2)) in effect means that a market participant cannot pay more for order flow than the commission received by the market participant for those orders - that is, it prohibits PFOF if it results in a ‘negative commission’.