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Allen Ferrell, A Proposal for Solving the 'Payment for Order Flow' Problem, 74 S. Cal. L. Rev. 1027 (2001).

Abstract: An issue that has increasingly occupied the attention of the Securities and Exchange Commission is “payment for order flow.” This is the practice whereby securities markets compete for orders placed by brokers by providing side payments to brokers in return for brokers promising to send them investors’ orders. Does this create inefficient nonprice competition between securities markets? This Article argues that it does, that all the proposed solutions (including the SEC’s disclosure requirements) miss the mark, and that the problem is really a result of the SEC’s regulation of the prices at which investors’ orders must be filled. As this paper will show, permitting brokers to credit investors’ orders with the National Best Bid or Offer (NBBO) price regardless of any price improvement realized on these orders would ensure an efficient allocation of investors’ orders across securities markets.