Payment for order flow sounds horrendously technocratic, and that’s because at some level, it is. However, take a look behind the legal jargon and you will find it is much more straightforward than EU policy wonks would have you believe. When a City trader places a trade through a broker, that broker must decide where to send the order. Instead of sending it to a public exchange, they can send it to a specialist trading firm called a market maker that executes the trade and, in return, pays the broker a small fee.
Why This Matters
That payment is the latest thing watchdogs are getting all hot under the collar about. They are worried it creates a so-called conflict of interest. If a broker is being paid to send a City trader’s trade somewhere, can you be sure they are acting in your best interest? This should not be in question. In fact, because market makers compete for that same flow of trades, they often offer slightly better prices than those available on exchanges. The investor can end up with a better deal, not a worse one.
Where the UK and EU Stand
More than a decade after banning the practice, the Financial Conduct Authority (FCA) is reviewing its stance buried in its March 2026 wholesale markets priorities paper. But while the UK is hopefully reconsidering, the EU is heading firmly in the opposite direction. From June, a full ban on payment for order flow will apply across the bloc. The position may sound politically principled, but in reality, it is deeply flawed economically.
To understand why, it is first important to realise that brokers are, by definition, required to get the best possible outcome for their clients. That includes price, speed and the likelihood of the trade actually going through. Firms must be able to show they are meeting this standard. In the US, where payment for order flow is widely used, this has helped deliver zero commission trading. Think of it as a quiet bidding process behind the scenes. Your trade has value, and different firms are trying to offer the best deal to handle it.
Europe’s approach assumes that the existence of a payment automatically leads to worse outcomes. But that just confuses incentive with result. The presence of a fee does not remove the obligation to act in the client’s best interest. That matters because Europe has a far bigger problem to solve. Its capital markets are shrinking in relative terms. When it comes to liquidity, how easy it is to buy or sell without moving the price too much, Europe is falling way behind the US. Companies list where capital is abundant. Investors allocate where markets are easy to trade. On both counts, Europe is losing ground.
How Payment for Order Flow Benefits the Market
Market makers sit at the centre of this debate. They use their own balance sheets to stand ready to buy or sell shares at any moment, quoting prices even when there are no natural buyers or sellers. This becomes important when it comes to the less traded stocks. If there are only a limited number of shares available and an investor wants to trade more, the market maker steps in to bridge the gap. Payment for order flow is one of the incentives that supports this activity. Remove it, and the question is not whether market makers disappear, but whether markets become less responsive, especially for smaller companies.
The argument that the practice is anti-competitive does not hold up either. Brokers are not tied to one venue. They can route orders to exchanges, alternative venues or market makers. These all compete to offer the best outcomes. That is competition in its purest form. Banning the practice outright is a blunt response to what is a supervisory issue. A more proportionate approach would focus on making payment arrangements clearer and holding firms accountable for outcomes rather than assumptions.
Hopefully, this is the direction the UK appears to be heading. The FCA has not yet set out detailed proposals, but its willingness to revisit the issue reflects a broader shift in regulatory thinking. Growth and competitiveness are moving back up the agenda alongside investor protection. Europe, on the other hand, is locking itself into a position that may prove difficult to reverse. The irony is there for all to see. At a time when policymakers want to make European markets more attractive, they are removing something that has supported liquidity, competition and retail participation elsewhere. If the UK moves towards a more progressive framework, the divergence will become even starker. Europe, on the other hand, may find that in trying to eliminate a perceived conflict, it has created a much larger problem.
Sylvain Thieullent is CEO at Horizon Trading Solutions.
