The Reddit-fueled frenzy in stocks such as GameStop Corp. and AMC Entertainment Holdings Inc. is prompting calls for regulators to reconsider a decades-old practice in the U.S. stock market: payment for order flow.
The practice, in which high-speed trading firms pay brokerages for the right to execute orders submitted by individual investors, has long been controversial. Some have said it warps the incentives of brokers and encourages them to maximize their revenue at the expense of customers. Supporters, including many brokers and trading firms, said it helps ensure investors get seamless executions and good prices on trades.
Last year, brokerages such as Charles Schwab Corp., TD Ameritrade, Robinhood Markets Inc. and E*Trade collected nearly $2.6 billion in payments for stock and option orders, according to JMP Securities. The biggest sources of the payments were electronic-trading firms such as Citadel Securities, Susquehanna International Group LLP and Virtu Financial Inc.
Payment for order flow helped set the stage for the manic trading in GameStop, whose shares began the year around $18, surged to a record close of $347.51 on Jan. 27 and ended Thursday’s session at $53.50. Other once-hot stocks such as AMC and Koss Corp. fell more than 20% on Thursday as the Reddit rally lost steam.
Author(s): Alexander Osipovich
Publication Date: 4 February 2021
Publication Site: Wall Street Journal