[wrsh07]

This example is apples to oranges

Imagine you are a market maker: you offer 2 APIs. The first, you allow anyone to trade on. The second, you only allow traders who are doing less than 100k in volume per day (and don't allow users to have multiple accounts)

Which API are you able to offer tighter bid/ask spreads on? Why?

That's the point. Pfof is saying: the second API is so valuable to me that I'm willing to pay to obtain customers. In the worst case, there will always be the open-to-all API.

Your second example continues to show the lack of understanding. You're saying: without the market segmentation, somehow I have a wider bid ask. That's not right at all. The entity that gets bad spreads is going to be the entity that would take advantage of good spreads. That's the whole point. Maybe there's a point that vanguard ends up getting worse execution because it gets lumped in with the rest of the market, but the counterargument to that is essentially just volume: is the retail market big enough that if you didn't segment them onto a better spread that the overall market would end up with better pricing. The answer: maybe! In some things! Is that really what the people who hate pfof want though?

My understanding is that people who hate pfof are actually the ones benefiting the most from it. (ie because unsophisticated investors get better execution)

[throwacomment]

PFOF does two things and you're only focusing on half of it.

1. It segments the counterparty they trade with.

2. They get dibs on new orders arriving.

You're only talking about 1. I'm talking about 2.

1 is also bad because this segmentation also gives them inforamtion no-one else can get. But the chain of reasoning to concretely show why its bad (for someone getting their orders PFOF'd) is less obvious and longer.

> Imagine you are a market maker: you offer 2 APIs.

This is so wildly different from how market works. You'll have to clarify what you mean. If the only way to trade is through the API, then you'll offer infinite spread on both. If normal markets exist alongside, then I don't bother using either.

[wrsh07]

I'm not sure what to say. Your arguments are extremely hypothetical and there's no evidence of the claimed badness today.

I don't find them convincing - why is it bad that someone paying for exclusive access to data gets exclusive access to that data? There are so many exclusive data vendors in financial markets, this one seems relatively low value