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Tipping for Order Flow

Traders Magazine, January 2005

John A. Byrne

What is wrong with tipping the waiter generously for excellent service? It's the American way, as American as the apple pie that came with dessert. The conventional rate for tips, or gratuities, ranges from 15 percent to 20 percent. This tipping for service has, in effect, become the custom in much of the hospitality sector, a custom some overseas visitors detest. It may be an embellished urban myth, but stories are told of fistfights breaking out in New York City restaurants between service staff and outraged foreign diners who refused to tip. But what exactly has this to do with Wall Street, the power lunch notwithstanding? It has to do with tipping for order flow, or more precisely, payment for order flow. This practice is as legendary as the infamous SOES bandits of the 90s, and it is as hot as shepherd's pie today in the options industry. The practice, still around in the equities markets, falls into a twilight zone of quasi under-the-counter payments, according to critics. They say it is a sort of black market for routing orders to service providers. But others say it's the American trading way, as American as a firm bid and offer. But there's one problem with this picture. The practice is as unacceptable to some trading pros as a waiter refusing to serve cheapskates who tip the customary 15 percent.

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