Payment for Order Flow (PFOF)

What is Payment for Order Flow?

Payment for order flow (PFOF) is an arrangement where your broker sends your trade orders to a market maker (like Citadel Securities or Virtu) instead of directly to a stock exchange. The market maker pays the broker for the right to fill your order. This payment is how brokers like Robinhood, Webull, and others offer zero-commission trading.

How it works

1. You place a buy order for AAPL on Robinhood
2. Robinhood sends your order to Citadel Securities (not to the NYSE)
3. Citadel fills your order and pays Robinhood a small fee (fractions of a cent per share)
4. You see zero commission on your trade

The debate

• The positive case: retail traders get zero commissions. Market makers claim they offer "price improvement" (filling you at a slightly better price than the exchange quote). For most retail-sized orders, the savings from zero commissions outweigh any cost from PFOF
• The negative case: market makers see your order flow before the public market, which is an information advantage. They may not always give you the best possible price. The SEC has investigated whether PFOF creates conflicts of interest

What it means for you

• Small orders: PFOF has minimal impact. The price improvement often makes up for any spread disadvantage
• Large orders: you may get worse fills than routing directly to an exchange. Active traders with large size often use brokers like Interactive Brokers that offer direct exchange routing
• It is legal: PFOF is regulated by the SEC and brokers must disclose it. The SEC requires "best execution" but the definition of that is debated

"If the product is free, you are the product." With PFOF, the product is your order flow. For most retail traders with small accounts, zero commissions are still a better deal than the old $7-per-trade model. But understand that the service is not free. You are paying with your order information.