FCA has published an update to its Market Watch item on payment for order flow. It has now carried out a review of 15 firms, to check how they monitor compliance with FCA requirements around conflicts, inducements and best execution. Its report shows it noted a distinction between activities that source exclusive liquidity for a specific client and those that have a range of counterparties. Firms tend no longer to charge liquidity providers when sourcing exclusive liquidity. However, they often could not be sure if they were legitimately providing non-exclusive liquidity where there is a range of counterparties – and this knowledge should be helpful in managing potential conflicts of charging both sides of a trade.
It also found conflicts systems and controls could generally be improved and noted firms sometimes route client orders to overseas affliliates that charge PFOF.
FCA now wants firms to consider their business against the report and consider what improvements they need to make to their practices to comply with MiFID 2.