UNITED STATES - SEPTEMBER 15: SEC Chairman Gary Gensler testifies during the Senate Banking, Housing, and Urban Affairs Committee hearing titled Oversight of the U.S. Securities and Exchange Commission, in Dirksen Building on Thursday, September 15, 2022. (Tom Williams/CQ-Roll Call, Inc via Getty Images)
Photo: Tom Williams/CQ-Roll Call, Inc via Getty Images

The persistence of payment for order flow

Protocol Fintech

Hello there, and welcome to Protocol Fintech. This Friday: making the case for payment for order flow, don’t call it a stablecoin, and the state of Ethereum staking.

Off the chain

When is a stablecoin not a stablecoin? When it’s USDF. Call it a “digital marker” or a “tokenized deposit,” please, members of the nine-bank consortium backing the idea. The notion is that when bank customers want to send money on the USDF network, a bank will mint USDF coins and use it to transfer the funds. The tokens won’t trade on crypto exchanges. The sole benefit appears to be purported cost savings. USDF will likely compete with more traditional rails like the existing RTP network and the forthcoming FedNow, and a potential CBDC. The cost picture will have to be really compelling for this idea to gain traction.

— Owen Thomas (email | twitter)

The orders must flow

SEC chair Gary Gensler has repeatedly criticized payment for order flow, the trade-handling practice for stocks that is used by Robinhood, Charles Schwab, and TD Ameritrade, among others. His concern: The practice can be a conflict of interest for brokerages, which can send orders to market makers who pay more, regardless of whether the market maker gets the best price for the investor.

But the SEC is now apparently preparing to back off of the idea of banning payment for order flow, according to Bloomberg. The SEC is still considering other ways of limiting the payments, which could make it less profitable for brokerages, Bloomberg reported.

Payment for order flow is just one tool. The SEC wants to make trading fairer for small investors and is also looking at several ways of doing that.

  • Gensler is looking at fairness issues across the stock markets. “Right now, there isn’t a level playing field among different parts of the market: wholesalers, dark pools, and lit exchanges,” he said in June.
  • There are legitimate reasons to keep payment for order flow around, despite the issues with conflict of interest and trade pricing, said Paul Rowady, founder of Alphacution Research Conservatory. For example, the payments can generate liquidity for parts of the market which might lack it, such as options or low-volume stocks.
  • As a result, the SEC appears to be looking more closely at other means of improving prices, which Gensler has discussed publicly, such as making price increments the same on lit exchanges as they are for wholesalers. The current system gives wholesalers the ability to price more precisely than exchanges.
  • The other potential mechanism is auctions on exchanges for retail order flow to ensure that retail trades get the best prices. That would be a big change from the current system, in which retail orders go to market makers and can get worse prices than institutional trades on lit exchanges.

These two changes alone could do a lot to address pricing problems. That’s because the key issue is pricing differences between exchanges for big institutions and wholesale market makers for retail investor order flow, said Hitesh Mittal, CEO at BestEx Research and former head of AQR’s Global Trading Strategies group.

  • “If those things are put in place, it will be sufficient to shift the flow from wholesalers to exchanges and ‘banning’ payment for order flow will not be needed,” Mittal said.
  • Also, there appears to be less political pressure to ban payment for order flow than there was last year during the meme-stock frenzy, since retail trading has fallen off, Rowady noted.

Robinhood could use some good news. But a reprieve on payment for order flow didn’t translate into a boost in its beaten-down stock price.

  • Robinhood shares jumped on the news, but then closed down 2.72% on Thursday. Virtu, a market maker that pays brokers for order flow, traded up more than 7% on Thursday.
  • Robinhood has “democratized losses,” Rowady said, and those traders who got in during the pandemic’s meme-stock frenzy aren’t eager to trade now. “All this activity trading Robinhood for zero commissions has basically chewed up their equity in their accounts,” he said.
  • Even if stocks turn up again, there are a number of competitors mimicking Robinhood’s model now. “If there's a retail frenzy again, it's not clear that Robinhood would be the same kind of beneficiary because now you have people who are mimicking the mobile-first, zero-commission game that they pioneered,” Rowady said.

For market makers like Citadel Securities, Jane Street, and Susquehanna, the softening of the SEC’s stance is certainly good news. But these large technology firms with big market share and large pools of data will still have ways of doing well regardless of the regulatory changes, Rowady said: “If the rulebook changes, then they will adapt, they will still be successful.” And payment for order flow could persist elsewhere: Robinhood has said it wants to popularize payment for order flow in crypto. The SEC has its hands full just trying to get crypto exchanges to register with it, and there’s money to be made routing trades in the meantime.

— Tomio Geron (email | twitter)


Hear what 1,000 C-suite execs have to say about the challenges facing accounts receivable teams today. Plus, learn why collaborative AR is the answer to the AR Disconnect that hurts customer relationships and kills cash flow.

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On the money

On Protocol: Kraken’s Jesse Powell explained his decision to step down as CEO to Ben Pimentel in a new interview.

The CFTC filed and settled charges against a DAO. The regulator fined Tom Bean, Kyle Kistner and bZeroX LLC $250,000 for illegally offering retail commodity transactions in digital assets. CFTC investigators also concluded that the group tried to evade enforcement by transferring the protocol bZeroX operated to the Ooki DAO, which the CFTC found was an “unincorporated association.”

FTX is in talks to raise another $1 billion. The valuation would be the same, around $32 billion, as in a January round where it raised $400 million, CNBC reports.

Helium funneled money-making hotspots to employees and other insiders, Forbes revealed. The crypto startup’s token subsequently saw its price collapse, meaning ordinary buyers of the hotspots made far less.

Also on Protocol: San Francisco is letting city police make use of the network of surveillance cameras funded by Chris Larsen, Ripple’s chairman and co-founder.

The IRS is seeking information about crypto holders who may not have disclosed transactions. It obtained a summons ordering M.Y. Safra Bank to disclose information about customers of crypto broker sFox.

“Buy now, pay later” is funding some weddings now (for better or for worse). Some firms are specializing in bringing pay-later financing to nuptials.

Klarna conducted a second round of layoffs. The company is laying off under 100 employees; it cut 700 jobs in May.

Coinbase got a thumbs-up from a Dutch regulator. The regulatory approval from the Netherlands central bank will eventually allow Coinbase to offer services to the full European Union.


Joe Rotunda, enforcement director at the Texas State Securities Board, is puzzled to find the states leading on crypto enforcement. “I didn’t anticipate we would end up in the driver’s seat,” he told the Washington Post. “There’s a lot of money on the table, these are very complex cases, and it would be the job of the national regulator. I don’t know why the SEC isn’t out there in these areas right now.”

The chart

A week after the Merge, Coinbase and Lido have emerged as the dominant entities on the Ethereum blockchain. Lido, which offers liquidity staking services and tools, has validated nearly 27% of transactions since the blockchain’s pivot from proof of work to proof of stake, according to data from the Blockchain Intelligence Group; Coinbase has validated about 15%.


Hear what 1,000 C-suite execs have to say about the challenges facing accounts receivable teams today. Plus, learn why collaborative AR is the answer to the AR Disconnect that hurts customer relationships and kills cash flow.

Learn more

Thanks for reading — see you Monday!

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