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There's also the specialist angle to consider. Exchanges choose MMs to act as a specialist for each traded stock. Specialists have higher quoting obligations & in return get even more order flow exclusivity. Who are the top specialists? You guessed it - the top wholesalers.
So to review, wholesalers pay brokers for order flow & to manage their routing obligations. Exchanges pay wholesalers & give them special trading privileges for their order flow. Double the PFOF, double the fun! What happens if it's banned?
In my opinion, not much would change at first. Brokers would still route to wholesalers because they don't want to deal with exchange connectivity & routing. They just wouldn't be getting paid PFOF anymore. Wholesalers would CLEAN UP in this scenario.
Complex exchange connections & rules have given wholesalers a way to insert themselves in the flow of options volume & control immense amounts of power, more so than equities. Banning PFOF won't immediately take that power away. We can't look solely at equities to make policy.
Thanks for reading - hopefully you learned something from this thread. I'll be doing a deeper dive into options market structure in an upcoming post - sign up below if interested:https://frontmonth.substack.com/
@AMCbiggums check em out good shit
Take a look at http://Public.com 's business model for example. They no longer sell order flow, but broker it, redeem fees from kickbacks, and pass the rest on to the retail trader.
Same Pig, Different Lipstick.. #OTCnotForMe
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