Payment for Order Flow Explained

Payment for order flow (PFOF) is money a brokerage receives from a market maker or trading firm when it sends that firm your buy or sell order. The brokerage keeps this payment instead of routing your order to the exchange that offers the best price. You do not see this money — it stays with the brokerage — but it affects the price you get on your trade.

Here is how it works in practice. When you place an order to buy 100 shares of a stock, your brokerage has a choice about where to send it. They can send it to a public exchange like the New York Stock Exchange, where the price is set by open bidding. Or they can send it to a market maker — a firm that buys and sells stocks all day — who will execute your trade at their own price. Market makers pay brokerages for this business because they profit from the difference between what they buy at and what they sell at. Your brokerage takes that payment and uses it to offer you commission-free trading.

The catch is that the price a market maker offers you is not always the best price available. A market maker might offer you $50.05 per share when the exchange is trading the same stock at $50.00. You lose that $0.05 per share — on 100 shares, that is $5. The brokerage keeps the payment from the market maker, which might be $0.10 per share or more. You bear the cost, even though you never see the transaction.

Key Takeaways

  • Payment for order flow is money brokerages receive from market makers for sending them your orders instead of routing to public exchanges.
  • You do not pay PFOF directly, but you may receive a worse price on your trade because the market maker's price is not always the best available.
  • Brokerages use PFOF revenue to offer zero-commission trading, so the cost is hidden in the price you receive rather than shown as a fee.
  • Not all brokerages use PFOF — some route all orders to public exchanges and charge a commission instead, or use a different business model.
  • The difference between the price you get and the best available price is called "price improvement" or "price degradation" depending on which direction it goes.

Why Brokerages Use Payment for Order Flow

Brokerages stopped charging commissions on stock trades around 2019, and PFOF became the main way they make money from retail traders. Without commissions and without PFOF, a brokerage has no revenue from your trades. They would have to charge you a monthly fee to use their platform, or they would not exist.

From the brokerage's point of view, PFOF is a straightforward business: they receive cash for each order they route to a market maker. The larger the order, the more they receive. A brokerage that sends millions of orders per day to market makers can earn millions of dollars in PFOF revenue. That money funds the platform, the customer service, the mobile app, and the research tools you use for free.

Market makers are willing to pay for this business because they profit from the spread — the difference between the bid price (what they will pay to buy) and the ask price (what they will charge to sell). When a brokerage sends them a steady stream of retail orders, they can predict their profits and bid aggressively for that flow. The more orders a brokerage sends, the higher the payment they can negotiate.

The Price You Pay When Using PFOF

The real cost of PFOF is not a dollar amount you see on a statement. It is the difference between the price you receive and the best price available at that moment. This difference is called price slippage or execution quality.

Imagine you want to buy a stock. The best bid on a public exchange is $50.00 per share. A market maker offers your brokerage $50.02 per share for your order, and your brokerage sends it there. You pay $50.02 instead of $50.00. The market maker keeps the $0.02 spread, and your brokerage keeps the PFOF payment they negotiated (say, $0.05 per share). You lose $0.02 per share. On a 1,000-share order, that is $20.

The size of this cost varies. On highly liquid stocks (those that trade in large volume), the difference between the best exchange price and a market maker's price is often small — a penny or less per share. On less liquid stocks, the gap can be wider. The cost also depends on the size of your order and the time of day you trade. Large orders during market hours may get better prices than small orders during off-hours.

Brokerages That Do Not Use Payment for Order Flow

Not all brokerages rely on PFOF. Some route all orders directly to public exchanges and charge you a commission per trade instead. Others use a hybrid model or a subscription fee. Your choice of brokerage affects whether you encounter PFOF.

Brokerages that avoid PFOF typically charge between $1 and $10 per trade, depending on the firm and the type of order. This is a visible cost you see before you trade. Whether this is cheaper than PFOF depends on how often you trade and the size of your orders. A trader who makes 10 trades per month might pay $10 to $100 in commissions. The same trader using a PFOF brokerage might lose $5 to $20 per trade to slippage, totaling $50 to $200 per month — or they might lose nothing if they trade liquid stocks at good times of day.

Some brokerages advertise that they offer "price improvement" — meaning they sometimes execute your order at a better price than the best available on the exchange. This is possible because market makers compete for order flow, and a market maker might offer a better price than the exchange to win your business. However, price improvement is not may provide, and it does not mean you always get the best possible price.

How to Know If Your Brokerage Uses PFOF

Your brokerage should disclose whether they use PFOF in their legal documents or on their website. Look for a section called "Order Routing" or "Execution Quality." Major brokerages like Robinhood, E-Trade, and Charles Schwab all use PFOF and disclose it publicly.

The SEC requires brokerages to publish quarterly reports on where they route orders and what prices they receive compared to the best available prices. These reports are public, but they are technical and difficult to read. A simpler approach is to call your brokerage's customer service and ask directly: "Do you use payment for order flow?" They are required to answer honestly.

If you want to avoid PFOF entirely, you can choose a brokerage that routes all orders to exchanges and charges a commission. You can also ask your brokerage if they offer an option to route orders to a specific exchange instead of using PFOF. Some brokerages allow this, though it may require a higher account balance or a premium membership.

PFOF and Market Structure

PFOF is controversial because it creates a conflict of interest. Your brokerage profits when they send your order to a market maker, even if that market maker does not offer the best price. In theory, they should route your order to wherever you get the best execution. In practice, PFOF revenue gives them a financial reason to do otherwise.

Regulators have debated whether PFOF should be banned or restricted. The SEC has held hearings on the topic, and some lawmakers have proposed legislation to eliminate it. The argument against PFOF is that it harms retail traders by degrading execution quality. The argument in favor is that PFOF enables commission-free trading, which benefits small traders who cannot afford to pay per-trade fees.

For now, PFOF remains legal and common. If you use a major retail brokerage, you are almost certainly using PFOF whether you realize it or not. Understanding how it works helps you make an informed choice about which brokerage to use and how to minimize its impact on your trades.

Frequently Asked Questions

Does payment for order flow mean my brokerage is stealing from me?

No, but it does mean your brokerage has a financial incentive to route your order somewhere other than the exchange with the best price. PFOF is legal and disclosed, but it does create a conflict of interest. You are not being stolen from — you are receiving a worse price than you might otherwise get, and your brokerage is profiting from that difference.

Can I avoid payment for order flow?

Yes, by choosing a brokerage that does not use it. These brokerages charge a commission per trade instead. You can also ask your current brokerage if they offer the option to route orders to a specific exchange, though this is not always available. For most retail traders, the commission cost of avoiding PFOF is higher than the slippage cost of using it.

Does payment for order flow affect options trades the same way it affects stock trades?

Yes, PFOF applies to options orders as well. The mechanics are the same: your brokerage routes your order to a market maker who pays them for the business, and you may receive a worse price than the best available. Options spreads are typically wider than stock spreads, so the impact of PFOF may be larger in dollar terms.

How much does payment for order flow cost me on each trade?

The cost varies by stock, order size, and market conditions. On highly liquid stocks, it might be a fraction of a penny per share. On less liquid stocks, it could be several cents per share. The only way to know for certain is to compare the price you received to the best price available at that moment, which requires checking the exchange data yourself.

Why do brokerages not just charge me a commission instead of using PFOF?

Some do. But most brokerages found that retail traders prefer zero-commission trading, even if it means slightly worse execution, over paying a visible fee per trade. PFOF allows them to offer free trading while still making money. If they switched to commissions, they would likely lose customers to competitors who still offer PFOF.