Glossary
Payment for order flow (PFOF)
Compensation a broker receives from a market maker for routing customer orders to it, disclosed quarterly in SEC Rule 606 reports.
On this page
Payment for order flow (PFOF) is money a brokerage receives from a wholesale market maker in exchange for sending its customers' orders to that firm to be filled. It is legal in the US and is a big part of how many zero-commission brokers earn revenue, especially on options. The practice is controversial because it creates a conflict of interest: the broker is paid by the party on the other side of its customers' trades.
How it works
Retail market orders are attractive to market makers because they are small and, on average, not driven by short-term information. A wholesaler fills them from its own inventory, often at a price slightly better than the national best bid or offer (National best bid and offer (NBBO)), and earns the spread. It shares part of that profit with the broker that sent the order. Investor.gov describes the payments as perhaps a penny or more per share.
Rules that apply
- Best execution. FINRA Rule 5310 still requires the broker to seek the most favorable terms reasonably available, whether or not it is paid for routing, and to review execution quality regularly.
- Disclosure. Under SEC Rule 606, brokers publish quarterly reports showing where they route orders and the net payments received per venue. A customer can also request where their own orders went over the prior six months.
The debate
Supporters say PFOF funds commission-free trading and that retail orders routinely get price improvement. Critics argue the improvement could be larger if orders competed openly on exchanges, and that payments tempt brokers to encourage frequent trading. Comparing brokers' 606 and 605 execution-quality reports is the most concrete way to judge the trade-off.