By Huw Jones
LONDON – Stockbrokers might be fuelling “speculative behaviour” among retail investors by touting “free” services and accepting payments for sending stock orders to a specific exchange, the European Union’s markets watchdog said on Tuesday.
A recent surge in retail investors buying stocks, largely on Wall Street but also to some extent in Europe, has highlighted the use of so-called payment for order flow (PFOF), the European Securities and Markets Authority (ESMA) said.
“PFOF raises serious investor protection concerns,” ESMA said in a statement, adding that in most cases, it was unlikely to be compatible with the bloc’s securities laws.
“PFOF causes a clear conflict of interest between the firm and its clients, because it incentivises the firm to choose the third party offering the highest payment, rather than the best possible outcome for its clients when executing their orders,” ESMA said.
Some brokers are also charging “zero commission” to investors for executing stock orders, often the same brokers that receive payment for order flow, it said.
Brokers are required to provide fair, clear and not misleading information to customers on all costs and charges, and marketing a service as cost free would infringe a firm’s compliance with these requirements, ESMA said.
Such marketing could incentivise retail investors’ gaming or speculative behaviour due to the incorrect perception that trading is free, it added.
Regulators in member states should “prioritise” this topic in their supervisory activities for 2021 or early 2022 to see how EU rules are being complied with, ESMA said.