The UK's Approach
The UK Financial Conduct Authority (FCA) effectively prohibited payment for order flow for retail clients. The FCA concluded that PFOF is incompatible with the best execution obligation under UK law. Firms subject to FCA regulation cannot receive PFOF for retail order flow routed under FCA rules. The UK's approach reflects a regulatory judgment that the conflict of interest inherent in PFOF cannot be adequately managed through disclosure alone.
The EU's MiFID II Framework
The EU's Markets in Financial Instruments Directive II (MiFID II), implemented across European Union member states, imposes strict limitations on inducements — payments from third parties that could conflict with a firm's duty to clients. PFOF falls within the category of inducements that MiFID II substantially restricts or prohibits for retail order routing. European brokers cannot generally accept PFOF for retail equity orders under MiFID II.
Canada's Prohibition
Canadian securities regulators have prohibited payment for order flow for equities. The Investment Industry Regulatory Organization of Canada (IIROC, now merged into the Canadian Investment Regulatory Organization) determined that PFOF is incompatible with best execution obligations under Canadian rules.
Why the U.S. Permits PFOF
The U.S. has historically addressed PFOF through disclosure requirements rather than prohibition. Critics point to the financial industry's political influence — including lobbying and campaign contributions from major financial firms — as a factor in the SEC's repeated deferrals on substantive reform. Citadel Securities and its founder Kenneth Griffin are documented contributors to political campaigns and PACs. Whether this political spending influences regulatory outcomes is a matter of public debate and The Ethics Reporter's ongoing coverage.