Payment for order flow multi-firm review findings

The report focuses on how wholesale broking firms manage conflicts of interest. This conflict is caused when firms charge a commission from market makers or liquidity providers for eligible counterparty (ECP) client business in listed derivatives markets.

What we did

We requested and reviewed information from 15 firms that undertake a range of activities. We visited 12 firms to assess how effectively they monitored compliance with our regulatory obligations on conflicts of interests, inducements and best execution.

We also examined the controls firms used to ensure they correctly classify the nature of their activity in individual transactions.

What we found

We found a distinction between broking activities that source exclusive liquidity for a specific client and those that provide non-exclusive liquidity to a range of counterparties.

In particular, we found that firms:

• have largely stopped charging liquidity providers when sourcing exclusive liquidity for a specific client, regardless of client classification
• found it difficult to be sure if their activity was legitimately providing non-exclusive liquidity to a range of counterparties - which may allow them to manage the conflicts of charging both sides of a trade
• could do more to improve the systems and controls they use to manage conflicts of interest for specific areas of their businesses
• sometimes routed client orders to overseas affiliates which charged liquidity providers PFOF

Next steps

Firms should read this report and consider how to improve their practices, policies, systems and controls to meet their obligations under MiFID II.

Our supervision work will continue to prioritise and monitor compliance with our conflicts of interest rules and views on PFOF. We will consider using our full range of powers, including enforcement action, to penalise firms breaching our rules.