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December 1, 2002

Payment for Order Flow Makes Comeback

By Saff Reports

The controversial payment for order flow practice has again found a supporter. The Philadelphia Stock Exchange has endorsed it, leading to criticism from other options exchanges.

For example, officials of the Chicago Board Options Exchange (CBOE) said it was "regrettable that the practice of payment for order flow is escalating." The American Stock Exchange reiterates its current policy, noting that the exchange does not support payment for order flow arrangements.

Regulators have generally looked down on payment for order flow, a practice which is also controversial on the equity markets. Arthur Levitt, the former chairman of the Securities and Exchange Commission, was strongly critical of the practice, arguing in his book, Take On The Street, that it raises conflict-of-interest issues.

Although many exchanges have discontinued it, some are now under pressure to find new revenue sources, a Philadelphia Stock Exchange official says.

"Nowadays we pay customers to send us order flow," according to Sandy Frucher, chairman of the Philadelphia Stock Exchange. His comments came at a recent conference on trading at Pace University in New York City.