Pension Funds and Market Quality
While pension funds are not directly affected by PFOF (which applies to retail orders), they are affected by market structure broadly. If off-exchange trading and internalization reduce the quality of public market price discovery — making exchange quotes less representative of true supply and demand — then institutional investors including pension funds may experience worse execution on their large block trades.
The Price Discovery Argument
A central academic argument against heavy off-exchange internalization is that it degrades price discovery: the process by which public markets aggregate information about supply and demand into prices. If a dominant fraction of retail order flow is executed off-exchange by market makers like Citadel Securities, the public exchange prices may become less informative. This is a theoretical harm that affects all market participants, not just retail investors.
Public Pension Fund Advocacy
Some public pension funds have filed public comment letters with the SEC on market structure reform proposals. CalPERS, for example, has expressed views on various market structure rules. Pension funds' institutional interests in market quality align broadly with retail investors' interests in fair execution, making them natural allies on certain market structure reform issues.
The Long View
Millions of Americans depend on pension funds for retirement security. The long-term health of public pension funds depends in part on investment returns, which depend in part on the quality of financial markets. In The Ethics Reporter's view, this connection between market structure — including the practices of major market makers — and retirement security deserves attention from policymakers and the public.