Reacting to investors' worries, the
Securities and Exchange Commission
Wednesday said it would study effect of payment for order flow on the options market.
The agency said in a statement that it would study the quality of the options market since the recent onset of changes in the options market such as order-flow-payment and "internalization arrangements." The SEC said the study will attempt to determine the effect of these practices on quote competition, spreads and execution quality.
Critics of the practice of payment for order flow argue that it discourages finding the best price for executing orders, because the final repository of the order is determined by the payment arrangement, rather than price competition.
Indeed, in its press release, the SEC acknowledged this concern. The agency said it "has repeatedly recognized that the practice constitutes a potential conflict for brokers handling customer orders, and that it may present a threat to aggressive quote competition."
But the SEC added that it wouldn't ban the practice, explaining that it "is extremely reluctant to take action that would prescribe the form of intermarket competition."
Philadelphia Stock Exchange
last week said it would reluctantly adopt a payment-for-order flow plan. The announcement comes in the wake of similar plans rolled out by the
Chicago Board Options Exchange
American Stock Exchange
. Under the Chicago plan, the exchange will collect 40 cents on each contract from designated primary market makers as well as from market makers in all equity options.