The Canadian Regulatory Approach
The Investment Industry Regulatory Organization of Canada (IIROC), now merged into the Canadian Investment Regulatory Organization (CIRO), determined that PFOF is inconsistent with best execution obligations under Canadian rules. Canadian broker-dealers cannot accept PFOF for equity orders. The prohibition applies to the same core arrangement that defines U.S. wholesale market-making.
Canadian Market Structure
Canadian equity markets operate without PFOF as a dominant revenue model. Canadian brokers typically charge explicit commissions or generate revenue through account fees, interest on cash balances, and other means. Market quality in Canada is comparable to the United States on most measures, contradicting arguments that PFOF is necessary for market function.
Investor Outcomes
Canadian retail investors benefit from an order routing environment where their broker's routing decisions are not influenced by third-party payments from market makers. This does not guarantee perfect execution quality — other factors also affect execution — but it removes one significant conflict of interest from the equation.
U.S.-Canada Comparison
U.S. and Canadian retail investors have access to largely similar investment products and trading platforms, but operate under dramatically different order routing frameworks. The juxtaposition illustrates that the U.S. choice to permit PFOF is a regulatory policy choice, not a market necessity. Whether the U.S. should follow Canada's approach is a policy debate that The Ethics Reporter believes deserves robust public attention.