By Shahir Gada, Co-founder, PiggyBank

In the world of Canadian financial markets, the concept of Payment for Order Flow (PFOF) has garnered significant attention and generated its fair share of confusion among retail investors. Many individuals and news outlets believe that payment for order flow is banned in Canada, but that is not exactly the case.

Recognizing the need for transparency and understanding, personal finance company PiggyBank has set out to unravel the complexities of PFOF in Canada. PiggyBank has reached out to the Investment Industry Regulatory Organization of Canada (IIROC), engaged with Canadian brokers, and meticulously dissected the terms of service of major brokerages to provide clarity to Canadian investors.

Is Payment For Order Flow Allowed in Canada?

Despite widespread belief that payment for order flow is banned in Canada, PiggyBank’s research reveals a more nuanced reality.

According to existing Canadian financial regulations, payment for order flow is prohibited on Canadian listed securities. However, Canadian brokerages are allowed to receive payment for order flow on non-Canadian listed securities, such as US listed securities.  

This distinction is crucial, considering that many Canadian investors have exposure to US securities in their portfolios. Understanding the scope and implications of payment for order flow regulations is essential for Canadian investors managing cross-border investments.

Here’s a summary of Canadian brokers that may engage in payment for order flow on non-Canadian securities:

– RBC Direct Investing

– CIBC Investor’s Edge

– Scotia iTRADE

– BMO InvestorLine

– TD Direct Investing

– Wealthsimple

– Questrade

– Qtrade

National Bank Direct Brokerage and Interactive Brokers (IBKR-Pro offering, which is the only one available in Canada) do not engage in PFOF.

What is Payment For Order Flow?

Payment for order flow is a practice where brokerages receive compensation for directing their customers’ trades to particular market makers or trading venues.

When investors place a trade through their brokerage, the brokerage may route that order to a specific market maker or exchange and receive a fee for doing so. This fee is paid by the market maker or exchange to the brokerage for the order flow.

Essentially, payment for order flow involves the brokerage selling their customers’ orders to other parties in the financial market.

Impact of Payment for Order Flow on Canadian Investors

Understanding the impact of payment for order flow is crucial for Canadian traders as PFOF can have both positive and negative effects.

On the positive side, payment for order flow can lead to potentially lower trading costs for investors. Brokerages may pass on some of the revenue earned from PFOF in the form of reduced commissions or fees, which can be advantageous for Canadian traders looking to minimize transaction costs.

However, there are also drawbacks to consider, the main one being the potential for conflicts of interest. When brokerages receive payment for directing orders to specific market makers or trading venues, they can prioritize their own financial interests over obtaining the best possible trade execution for their clients. This conflict of interest can potentially impact the overall returns of investors.

Many readers are likely already familiar with the GameStop trading saga of early 2021, which brought attention to the practice of payment for order flow. During this time, many investors became aware that American brokerages such as Robinhood were making money by selling customer order flow to market makers. This occurrence triggered discussions about the implications of payment for order flow and the fairness of the financial system and reinforces why retail investors deserve transparency surrounding payment for order flow in Canada.

In Summary

The payment for order flow landscape in Canada is characterized by nuances often misunderstood by many investors. While PFOF is not permitted on Canadian listed securities under current financial regulations, many Canadian brokerages have the liberty to accept PFOF on non-Canadian listed securities. This distinction underscores the importance of understanding the scope and implications of PFOF regulations, particularly for investors with exposure to cross-border securities. As the debate surrounding PFOF continues, informed decision-making remains paramount for Canadian investors seeking to optimize their investment strategies.