Larry Tabb, founder and CEO of the research firm TABB Group, weighed into the payment for order flow debate with an open letter to Senator Carl Levin. Tabb took issue with statements Levin made in a letter to SEC Chair Mary Jo White urging the Commission to prohibit both payment for order flow and the associated maker-taker system.
While Tabb agreed that more transparency may be required, he argued that banning payment for order flow would only create more problems. ” In his view, banning payment for order flow would not change the value of the order stream, but could change how that value is harvested. Tabb added in a comment to his post, that if the practice is banned, three options remain for the order flow: “monetize it myself, give it away to the guy that pays me the most under the table, or just provide it free to the market and have market makers mine it.”
In contrast, Tabb argued that by collecting payment for order flow, brokers force wholesalers to compete on price improvement, and brokers can pass some of the benefits to retail investors. While this benefit may only amount to $0.002 per share, “it transfers more value to retail investors than if they transacted natively on exchange.” Hence, while Tabb admitted that the practice creates conflicts, he concluded that “[n]o matter how bad payment for order flow sounds, payment for order flow is a legitimate practice governed by the SEC.”
Levin’s letter followed a June 17 hearing by the Senate Permanent Subcommittee on Investigations which covered conflicts of interest in trading venues, and the impact on markets of high frequency trading. Buy-side traders and high-frequency trading commentators Sal Arnuk and Joe Saluzzi of Themis Trading offered a response to Tabb here.