Payment for Order Flow: The Most Evil Practice in the Business

The chairman of the SEC said yesterday that a full ban of payment for order flow (PFOF) is “on the table.”

Folks, this is a move I’ve been waiting for since I first hit the trading floor 20 years ago.

Why? Because PFOF is the most evil practice in the business.

Those “free” trading apps so many retail traders use – Robinhood, E-Trade, Schwab? Yeah, they aren’t free.

There’s a cost associated with trading on these apps. And it’s a much bigger cost than traditional paid brokerages charge.

When you open your phone and send your order to Robinhood, it doesn’t hit the open market right away. First, your trade gets sent to Citadel, Virtu, or Wolverine.

These market makers get a free look at your trade – and they can trade it before it hits the open market – giving them an unfair advantage, and giving you a bad price on your trade.

If you’re trading on a free app, you’re getting worse pricing on your stocks and options than you would on a regular platform, where you can direct your flow to actually hit the marketplace immediately.

Every time you make a “free” trade, it costs you real money.

Does that piss you off? Because it should. It sure pisses me off. I get so heated talking about PFOF, I could go on for hours about how corrupt it is until I’m red in the face.

But thanks to the SEC, I might not have to.

If PFOF is banned, then the entire business will change to the customer’s benefit. You, as the customer, will be the biggest winner…

But there will be some big winners on the stock market as well.

On this news from the SEC, Robinhood Markets Inc. (Nasdaq:HOOD) stock tanked almost 7% yesterday.

Clearly, the “free app” is going to hurt big time on a move like this. PFOF is the way HOOD makes money, after all.

We could go back to having only three or four option exchanges, and only three or four stock exchanges as the rest of them collapse without PFOF holding them afloat.

It’ll tighten the markets – and it’ll make the following three names skyrocket, as trading volume pours in…

  1. Intercontinental Exchange Inc. (NYSE:ICE), which owns the New York Stock Exchange
  1. Nasdaq Inc. (Nasdaq:NDAQ), owner of the Nasdaq exchange
  1. CBOE Global Markets Inc. (BATS:CBOE), which will start seeing a ton of option flow as they provide the best option market

If the SEC does decide to finally ban this terrible practice of auctioning off customer orders to the highest bidder, I would go long these three names.

Two Chances to Watch Me Live Trade

It’s a big week for me – and in turn, that means it’s a big week for you, as a Profit Takeover reader.

Tomorrow at 12:30 PM ET sharp, I’m live trading exclusively for Profit Takeover readers. Like usual, we’re going to talk volatility, market analysis, and I’m going to give you a free live trade.

But this time around, we’re doing something even better.

I’m going to give you first access to my newest trading venture. One with the power to give you up to five recommendations per week – each one under $100, with the potential to make 1,000% gains in 30 days or less.

But it’s not the only time you’ll get a sneak peek of this system.

Because on Thursday at 3:30 PM, Kenny Glick and I are putting on an encore performance of our “trade the close” session.

The last time Kenny and I live traded the close together, well, it was a hit…

And we can’t wait to do it again.

To get the full Money Morning LIVE schedule for the week, be sure to follow our calendar right here.

I can’t wait to live trade with you soon!

Mark’s Watchlist

  1. CBS Corp. (Nasdaq:VIAC)

I keep expecting VIAC to make a move, but it just keeps failing. It’s down 39% in the past six months, and it’s barely moved since May.

But here’s the thing – options are dirt cheap. They’re at one-year lows. In fact, they’re approaching two-year lows. This is about as cheap as options will get in VIAC, and we’ve got to take advantage.

I’m looking at the October 8 $40 or $41 calls as a couple really inexpensive plays on making it to its resistance point. Once VIAC hits $41.50, I’d take off some of your position. Then, you can wait and see if VIAC gets a launch higher.

  1. Alpha Pro Tech Ltd. (NYSEAMERICAN:APT)

This protective garment maker got a huge lift back at the start of the coronavirus pandemic. Since then, however, it’s been on a slow trend lower. That said, I think a pop is in the works. And the October $9 calls are only $0.60 for a cheap way to play that pop out.

  1. Caterpillar Inc. (NYSE:CAT)

I see a small pop in CAT coming soon, as the stock looks to make a run back to its post-earnings high around $224. And I’m looking at the October 8 $215 calls for around $5 to play it.

  1. Weyerhaeuser Co. (NYSE:WY)

Lastly, I’m looking at another name that host of Money Morning LIVE, Olivia Voz, brought to my attention. Up about 5% over the past month, WY could be headed for another move higher. And the September 17 $37 calls for only $0.35 is a great short-term trade on the REIT.

Impact Money

Back on July 7, one big-money trader bought 40,000 contracts of the Trade Desk Inc. (Nasdaq:TTD) October 15 $75 calls.

And now, over a month later, with roughly six more weeks until expiration, they’re bailing:

Click To Enlarge

This trader knew they were going to lose. And although we always watch trade opens in big money flow, I like to pay attention to closes as well – and in this case, we know exactly what not to do.

Whoever this is, well, they bought expensive implied volatility (IV) and sold cheap IV. And we’re learning from that big mistake.

Here at Profit Takeover, we look for options with cheap IV. That way, our risk is always low.

And during tomorrow’s live trading session at 12:30 PM ET, I’m going to show you exactly how you can start receiving even more cheap options trades.

Add tomorrow’s live show to your calendar now by clicking here.

See you there,

Mark Sebastian


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