Updated: Mar 25, 2021
In examining the aftermath of the extreme volatility recently seen with Wall Street Bets and Meme stocks, one of the villains that has emerged is Payment for Order Flow, or PFOF. This is the practice of market-makers paying brokers (like All of Us) to execute customer orders.
Somehow the narrative has been twisted to say that this practice enables institutions to steal from the little guys and girls -- that they are to be blamed for the recent market rancor. Some of our competitors have even tried to capitalize on this by saying that they don’t use market-makers and go direct to exchanges. They tout they are PFOF-free and replacing it with a tipping feature to replace the revenue they would have received.
This has bothered me greatly because this narrative capitalizes on many people’s irrational fears. Saying that you are against payment for order flow sounds nice. It’s a very easy marketing ploy to point a finger at something that sounds evil and is complex for most to understand.
However, this isn’t entirely accurate and runs counter to both my experience as a former market-maker and also as a former hedge fund manager. More importantly, this runs counter to the reason why I started All of Us -- to empower investors with radical transparency.
Let me say this for the record: we are paid for order flow at All of Us. What’s more, because we believe in radical transparency and alignment, we share that revenue with you. But let me address some of the myths around PFOF, even if we didn’t share the revenue.
MYTH: These big market-makers will front-run my trading and profit for themselves.
FACT: These market-makers are regulated and audited heavily. Regulations require all market-makers to fill customers at or above the bid (when selling) and at or below the offer (when buying) of the best price available in the market – and there is an audit trail of what the prices were at the time the order was filled that regulators monitor.
MYTH: You get bad pricing and execution through market-makers. It’s better to just go direct.
FACT: You usually get better pricing and execution. Market-makers have tried to buy and sell, making the spread, for over a hundred years in the US and the current market-makers are just better at it because they do it against their whole portfolio instead of thinking of each stock by itself. This means their ability to offer great prices to customers is better than it ever has been before.
MYTH: Tipping for a trade is a better deal for investors than PFOF.
FACT: Tipping will likely lead to more price obscurity and opacity for investors. There always be inventors who choose not to tip, so what is a broker to do for revenue? There is no such thing as a free lunch. They will have to find another revenue stream to replace it with -- either fees or other service offerings that may not be clear to investors. What’s more, tipping rewards bad actors. Those that don’t tip will be accruing the most benefit on the backs of the generous.
Lastly, tipping seems illogical as a matter of common sense. Normally, we tip for more expedient service (and this says nothing of the racist, sexist practice of tipping writ large -- but I digress). But does this set an unspoken expectation that those that tip receive better execution? What trade would merit a tip? Which ones would not? While surely not what happens in practice, this seems odd, at the very least.
As a startup founder, I understand the desire and attractiveness of tearing down legacy institutions. However, we owe it to ourselves to shoot straight with our investors. For us, the enemy is not PFOF, it’s the lack of transparency in how brokers share information and money. In fact, we think PFOF is a good deal for investors, and we are not alone.
You can always count on me and the team at All of Us to tell you the straight truth even when it’s complicated.