Australian financial regulator ASIC is planning to place further restrictions on payment for real order flow (PFOF). According to the regulator, the proposal will include deals between non-market participant intermediaries.

The PFOF allows retail brokers to send customer orders to wholesale brokers unlike in other practices where it is sent to exchanges.

However, the wholesalers make rebates and payments in return for a slightly higher execution price.

This new approach by ASIC is coming at a period when retail traders in the U.S. have increased their patronage of Online brokerages such as Robinhood Markets.

The Australian regulator stated that its rules do not entertain certain PFPF scenarios. As a result, it plans to close the “regulatory gap”

ASIC added that PFOF arrangements lead to conflicts of interest that can result in poor client outcomes. Also, it can harm pricing and market liquidity.

Other regulators also against PFOF

Apart from ASIC, the US Securities and Exchange Commission (SEC) is actively inspecting PFOF due to concerns it may allow brokers to send customer orders to areas that maximize their profit.

The SEC fears that allowing such an order method will limit the options for customers for the best execution.

While PFOF is not common in the Australian market, ASIC is taking precautions, following its growth in other jurisdictions, especially in the United States. Other regulators in Europe are also considering the scrutiny of payment for order flow.

ASIC is seeking feedback on its proposal to amend the present prohibition. The regulator says the proposed amendments will be a proactive measure intended to prevent the emergence of PFOF scenarios in Australia.

Respondents are expected to submit their reply on or before November 3, 2021, before any action is taken on the proposal. The regulator hopes to receive responses that will enable it to restrict brokers and other platforms from making PFOF arrangements.