Payment for order flow (PFOF) is the payment of up to one cent per share, that stockbrokers can receive from market makers in return for the broker routing trades for their customers to that market maker. It has been a practice under heavy criticism from retail traders being called a kickback and front running orders.
PFOF has recently come under mainstream awareness and scrutiny as RobinHood has been so successful in growth and bringing younger people into investing and trading. How they make money with their zero commission business model and methods for filling orders has become questioned in the media.
Payment for order flow is a key part of the process in modern markets routing systems that handles the majority of retail traders’ buy and sell orders for both stock and option trades.
Market makers like Citadel LLC pay brokers for the ability to fill small retail trader’s orders. Market makers profit from trading both sides of the bid-ask spread of quotes and returns part of this profit as a PFOF to the original routing broker. Fractions under a penny per share can also be sent back to the trader for a better fill. Stock and option brokers in the U.S. that accept PFOF are Robinhood, E-Trade, Ally Financial, Webull, Tradestation, The Vanguard Group, Charles Schwab Corporation, and TD Ameritrade, while the other brokers that don’t receive payment for order flow are Interactive Brokers (pro accounts), Merrill Edge, and Fidelity Investments.
Accepting PFOF is only allowed in the U.S. if no other exchange has a better quote on the National Market System. Brokers must inform the trader that it accepts PFOF. Trades must receive the best execution, which is the best price on the market or the fastest execution that can be completed.
Payment for order flow is not allowed in Canada or the United Kingdom, so all brokers are commission based.