Payment for order flow is money a broker pays to a trading firm for the right to send customer trades to that firm instead of somewhere else

When you place a stock or options trade through your brokerage, your broker does not have to send that order to an exchange like the NYSE or NASDAQ. Instead, your broker can route it to a market maker — a firm that buys and sells securities on its own account and profits from the difference between the buy and sell price (called the spread). Market makers want order flow because it gives them the chance to profit from those spreads. So they pay brokers for the privilege of receiving customer orders. That payment is called payment for order flow, or PFOF.

The broker keeps this payment. You do not see it as a line item on your statement, and it does not reduce your commission — in fact, many brokers advertise "commission-free" trading while collecting PFOF payments behind the scenes. The arrangement benefits the broker (who gets paid without charging you) and the market maker (who gets a chance to profit), but the benefit to you is less clear and depends on how the market maker executes your trade.

Key Takeaways

  • Payment for order flow is money a market maker pays your broker for the right to execute your trades, not a fee you pay directly.
  • Your broker receives this payment but does not disclose it as a separate charge, even though it creates a financial incentive to route orders to certain firms.
  • Market makers profit by filling your order at a price slightly worse than the best available price on public exchanges, and they pay brokers to access that opportunity.
  • Brokers are required by law to route orders in a way that is reasonably likely to result in the best execution for you, but PFOF creates a conflict of interest.
  • You can request that your broker route your orders to an exchange instead of a market maker, though not all brokers offer this option.

How the payment actually flows

When you submit a buy order for 100 shares of a stock, your broker has several choices about where to send it. One option is to send it to a public exchange (NYSE, NASDAQ, etc.), where it will be matched against other public orders. Another option is to send it to a market maker who has agreed to pay your broker for order flow.

If your broker sends the order to a market maker, that firm fills your order from its own inventory. The market maker makes money by selling you shares at a price slightly higher than what it paid for them, or buying from you at a price slightly lower than what it will sell them for. The difference is the spread. The market maker then pays your broker a small amount per share — typically a fraction of a cent — for sending that order its way. A broker handling thousands of orders per day can collect substantial PFOF revenue without you ever knowing it happened.

This arrangement is legal under SEC rules, but it must be disclosed. Your broker is required to tell you in its order routing disclosures (usually buried in account documents or online) that it receives PFOF payments and from which firms. You can request a copy of these disclosures, though few investors do.

Why brokers prefer routing to market makers

From a broker's perspective, PFOF is revenue with no cost to you — or so the pitch goes. The broker does not charge you a commission, yet still makes money. This is why so many retail brokers advertise free stock trading: they are not losing money on commissions because they are making it on order flow.

The problem is the conflict of interest. A broker that receives PFOF payments has a financial incentive to route orders to the market makers who pay the most, not necessarily to the venue that would give you the best price. The SEC requires brokers to route orders in a way that is "reasonably likely to result in the best execution," but that rule is vague enough that a broker can argue that a market maker's payment justifies routing an order there even if the public exchange price is slightly better.

In practice, market makers often do offer competitive prices because they want to keep receiving order flow. But the incentive is not perfectly aligned with your interest. A market maker might fill your order at a price that is legal and acceptable but not the absolute best price available at that exact moment.

The difference between PFOF and best execution

Best execution is a legal standard that requires brokers to route orders in a way that produces the best overall result for the customer, considering price, speed, size, likelihood of execution, and other factors. It does not mean you always get the single best price available anywhere — it means the broker must act reasonably to get you a good price.

PFOF does not automatically violate best execution rules. A market maker can pay for order flow and still fill your order at a competitive price. However, the payment creates a financial incentive that can pull a broker toward routing decisions that benefit the broker more than you. Some market makers have been fined by regulators for filling customer orders at worse prices than they were required to offer, suggesting that the incentive structure does sometimes lead to worse outcomes for retail traders.

The SEC has proposed rules to limit PFOF or require brokers to auction order flow to the highest bidder (which would theoretically benefit customers), but as of now, PFOF remains a standard practice in the retail brokerage industry.

What you can do about payment for order flow

If you want to avoid PFOF, you have limited but real options. Some brokers allow you to request that your orders be routed to a specific exchange instead of a market maker. This is sometimes called "exchange routing" or "direct routing." You may need to call your broker or check their order routing settings to enable this.

The downside is that exchange routing can be slower and may result in your order not being filled if there is no matching order at that moment. Market makers, by contrast, are required to fill your order when ready at a quoted price. So avoiding PFOF entirely means accepting a trade-off in speed or certainty of execution.

Another option is to use a broker that does not participate in PFOF arrangements, though these are rare among retail brokers. Some institutional brokers and certain niche platforms have built their business model around rejecting PFOF, but they typically charge commissions or have higher account minimums.

For most retail investors, the practical reality is that PFOF is part of the free-trading model. The impact on your individual trades is usually small — fractions of a cent per share — but it adds up over time and across many trades. Understanding that it exists and how it works is the first step to making an informed choice about which broker to use.

Frequently Asked Questions

Is payment for order flow illegal?

No. PFOF is legal under SEC rules as long as brokers disclose it and route orders in compliance with best execution standards. However, regulators have scrutinized the practice and proposed restrictions. Some countries, including the UK and parts of Europe, have banned or severely limited PFOF.

Does payment for order flow mean I'm getting a worse price?

Not necessarily. Market makers often fill orders at competitive prices because they want to keep receiving order flow. However, the financial incentive to route orders to the highest-paying market maker can sometimes result in a price that is slightly worse than the best available price at that moment. The impact is usually small but compounds over many trades.

Can I see how much my broker makes from payment for order flow?

Your broker is required to disclose which firms pay for order flow and the general terms, but they do not break down the exact dollar amount they receive per order or per customer. You can request your broker's order routing disclosures to see which market makers they use and that they receive PFOF payments.

What happens if I ask my broker to route my orders to an exchange instead?

Many brokers allow this, though you may need to request it through their website settings or by calling. Exchange routing can be slower and your order may not fill when ready if there is no matching order waiting. Market makers, by contrast, are obligated to fill your order right away at a quoted price.

Do all brokers use payment for order flow?

Most major retail brokers do, because it allows them to offer commission-free trading. Some brokers, particularly institutional or niche platforms, do not participate in PFOF but typically charge commissions or have other fees instead. Check your broker's disclosures to confirm whether they receive PFOF payments.