Payment for Order Flow: Who Makes Money and How
Direct answer: Payment for order flow (PFOF) is a practice where broker-dealers receive compensation from market makers for routing customer orders to them. The market maker profits from executing the orders within the bid-ask spread. Retail brokers use PFOF revenue to offset or replace trading commissions. The practice is regulated in the U.S. and banned in the UK and EU.
What Payment for Order Flow Is
Payment for order flow is a compensation arrangement between retail broker-dealers and wholesale market makers. When a retail investor submits a stock or options order through a broker like Robinhood, TD Ameritrade, or Charles Schwab, the broker must decide where to send that order for execution. Instead of routing it directly to a stock exchange, the broker routes it to a wholesale market maker (such as Citadel Securities or Virtu Financial), and the market maker pays the broker a small amount, typically fractions of a cent per share, for the privilege of being the one to execute that order.
The market maker profits from the arrangement because it can execute the order within the bid-ask spread. If a stock has a bid price of $10.00 and an ask of $10.01, and a retail buyer sends an order, the market maker sells at $10.01 (or slightly less, providing small price improvement) while its own cost to acquire the share is closer to $10.00. The spread, in whole or in part, is the market maker's profit. It shares a small slice of that profit with the broker as the PFOF payment.
Who Receives PFOF and How Much
The broker-dealer receives the PFOF payment from the market maker. Per SEC Rule 606, brokers must file quarterly reports disclosing how they route orders and the PFOF payments they receive. These reports are public and can be found on the SEC's website.
PFOF rates vary by order type. Options orders generate substantially more PFOF per order than equity orders because options spreads are wider and the profit opportunity for the market maker is larger. According to Rule 606 disclosures, retail brokers receive PFOF measured in fractions of a cent per share for equity orders (often $0.001 to $0.003 per share) but per-contract payments for options orders can be in the range of $0.10 to $0.60 per contract or more.
The Market Maker's Position
Wholesale market makers who pay PFOF are entities like Citadel Securities, Virtu Financial, Susquehanna International Group, and Two Sigma Securities. These firms are high-frequency trading and market-making firms that process enormous volumes of retail order flow simultaneously. Their business model depends on internalizing retail flow (executing it against their own inventory) rather than sending it to public exchanges.
The advantage of retail order flow is that it is typically uninformed. Retail investors are not acting on non-public information. This makes retail flow less risky for market makers to execute against: the risk that they are on the wrong side of a trade with a well-informed counterparty is lower. Institutional order flow and professional traders are more likely to be acting on superior information, making those orders riskier to internalize.
Regulatory History and the Debate
The PFOF debate has been central to equity market structure discussions since at least the 1990s. In the U.S., the SEC has repeatedly studied whether PFOF harms retail investors and consistently concluded that disclosure requirements and best execution obligations are sufficient to manage the conflict. The SEC proposed significant changes to PFOF rules in 2022 under Chair Gary Gensler, including requiring that retail orders be exposed to a competitive auction before being executed by a market maker. Those reforms were not finalized before the change in administration in 2025.
What is payment for order flow?
Payment for order flow (PFOF) is a practice where a broker-dealer receives compensation from a wholesale market maker for routing its customers' orders to that market maker for execution. The market maker profits by executing the orders within the bid-ask spread. The PFOF payment, typically fractions of a cent per share, is how the market maker shares a portion of that profit with the broker. Brokers use this revenue to offer zero-commission trading to retail customers.
Is payment for order flow legal in the United States?
Yes, payment for order flow is legal in the United States and regulated by the SEC and FINRA. Brokers are required to disclose whether they receive PFOF under SEC Rule 606 and to show quarterly reports of where they route orders. Brokers are also subject to a best execution obligation. The SEC proposed changes to PFOF rules in 2022, but PFOF remained permitted with disclosure requirements as of 2026.
Has the EU or UK banned payment for order flow?
Yes. The European Union banned payment for order flow for professional clients under MiFID II and has moved to extend the ban more broadly. The UK's Financial Conduct Authority (FCA) banned the practice for its regulated markets. EU and UK regulators concluded that PFOF creates conflicts of interest that cannot be adequately managed through disclosure and is incompatible with best execution requirements. U.S. and European market structures have diverged significantly on this issue.
How does Robinhood make money from PFOF?
Robinhood pioneered the zero-commission trading model at scale for retail investors and initially relied heavily on PFOF as its primary revenue source. For each order routed to a wholesale market maker like Citadel Securities or Virtu, Robinhood received a PFOF payment. Robinhood discloses these payments in its SEC Rule 606 reports. In subsequent years, Robinhood has diversified into other revenue sources including margin lending, subscription fees, and cryptocurrency trading revenue.
What is price improvement in the context of PFOF?
Price improvement occurs when a trade executes at a better price than the national best bid or offer (NBBO) quoted on exchanges at the time the order is received. If a stock is quoted with a $0.01 spread and a retail buy order executes at the midpoint, that is price improvement. Market makers who receive PFOF claim they provide price improvement benefiting retail investors. Critics argue the improvement is smaller than what competitive exchange execution would achieve and that the PFOF incentive compromises broker routing decisions.