A stunning 80% of retail order flow gets routed to just four wholesalers. Citadel Securities, Susuqehanna, Jane Street & Wolverine are some of the top firms. These firms hold dominant power over the US options market.
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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?
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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.
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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.
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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/
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Totally. I’ve been saying this exact logic every time Gensler cries wolf about pfof and Virtu sells off. Like no idiots y’all should be buying virtu hard.
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Ps i also just DM’d you
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