What Is Payment for Order Flow (PFOF)? How Brokers Get Paid

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Payment for order flow (PFOF) is the compensation a broker receives from a market maker, often called a wholesaler, for sending customer orders to that firm for execution. The broker routes your buy or sell order to the market maker. The market maker fills it and pays the broker a small amount per share or per options contract. That arrangement is how many brokers offer stock and options trades with no commission: the customer pays nothing up front, and the broker is paid by the firm on the other side of the trade.

The practice is legal in the United States as long as brokers meet their best-execution and disclosure obligations. It is now prohibited in the European Union, and the UK regulator has long treated it as incompatible with its rules. It remains contested because the broker earns money from where it sends your order, while it also has a duty to get you the best available execution.

What Payment for Order Flow Means

Every trade needs a counterparty. When you buy 100 shares, someone has to sell them to you. On an exchange, that might be another investor’s resting order or a market maker posting quotes. In the US retail market, most marketable stock orders from retail brokerages do not go to an exchange first. They go to a small group of wholesale market makers that execute them off-exchange, either by filling them from their own inventory (internalization) or by routing them onward.

A wholesaler that wants a steady stream of these orders can pay the broker for them. That payment is payment for order flow. The broker sells access to its customers’ orders, which is why the practice is sometimes called “selling order flow.” It is not a refund to the customer and it is not a fee the customer sees on a trade confirmation. It is revenue the broker books from the market maker.

The economic logic runs in a circle. Brokers competed in the 2010s to cut commissions, and many reached zero. One major app-based broker launched commission-free stock trading publicly in 2015, and much of the industry followed by the end of the decade. PFOF and related routing revenue replaced part of the lost commission income, and interest on customer cash became another significant source once rates rose. If you are not paying for a service directly, someone else is, and that party expects to earn it back from the trading.

How Payment for Order Flow Works

The process involves three parties: the investor, the broker, and the market maker. A typical flow looks like this:

1. The investor places an order. You submit a market order or a limit order through your broker’s app or platform.
2. The broker decides where to route it. Instead of sending the order directly to an exchange, the broker sends it to a wholesaler it has a routing arrangement with. Brokers often split flow among several wholesalers.
3. The market maker executes the order. The wholesaler fills the order, usually at or better than the best publicly displayed price, and earns the difference between its buying and selling prices over many trades.
4. The market maker pays the broker. The broker receives PFOF on the routed orders, usually calculated per share or per contract and settled in aggregate, not trade by trade on your statement.

Why Market Makers Pay for Retail Orders

Market makers make money by buying at the bid and selling at the ask, collecting the spread. Their main risk is trading against someone who knows more than they do. If a hedge fund buys aggressively just before a stock jumps, the market maker that sold to it loses money. This is called adverse selection.

Retail orders carry less of that risk. They are usually small, spread across many unrelated decisions, and not based on information about the next few seconds or minutes of price movement. A market maker can fill them at a slight improvement over the public quote and still expect to profit on average, because the orders are less likely to move against it. A constant stream of buys and sells across many stocks also lets it offset positions without going to the open market as often.

Because this flow is valuable, wholesalers compete for it. Part of the competition takes the form of payments to brokers, and part takes the form of price improvement for the broker’s customers. The balance between those two is the central question in the PFOF debate.

How the Payment Is Set

PFOF arrangements vary. The payment can be:

• a fixed amount per share (for stocks) or per contract (for options),
• a share of the spread the market maker captures on the order,
• other incentives tied to the volume or type of flow.

Payments often differ by order type. A marketable order, which can be filled immediately against the current quote, is treated differently from a non-marketable limit order that waits on the book. US disclosure rules require brokers to break the payments out by order category for exactly this reason.

The Measurements Behind Execution Quality

PFOF only makes sense next to the measures used to judge whether a fill was good. Four terms do most of the work.

National Best Bid and Offer (NBBO). The highest displayed bid and the lowest displayed ask across US exchanges for a stock at a given moment. It is the main minimum benchmark for a fill. Regulation NMS generally requires trading venues to avoid executing trades at prices worse than protected quotes, subject to exceptions.

Midpoint. The average of the NBBO bid and ask:

Midpoint = (Best bid + Best ask) / 2

Price improvement. How much better your fill was than the NBBO:

For a buy: Price improvement per share = Best ask − Execution price For a sell: Price improvement per share = Execution price − Best bid

Effective spread. A measure of what you actually paid relative to the midpoint, expressed as a round-trip figure:

Effective spread = 2 × |Execution price − Midpoint|

Price improvement tells you how much you beat the posted quote. The effective spread tells you how much you gave up relative to a “fair” midpoint value. A fill can show price improvement and still have a meaningful effective spread if the quoted spread is wide. Both are measured at the moment the order arrives, so fast-moving prices can make a single fill look better or worse than the routing quality really was.

Example of Payment for Order Flow

The figures below are hypothetical and chosen to show the mechanics. They are not any broker’s or market maker’s actual terms.

A Stock Order

You use a commission-free broker and place a market order to buy 100 shares of a company at the moment the NBBO is:

• Best bid: $50.00
• Best ask: $50.05
• Midpoint: $50.025

Your broker routes the order to a wholesaler that pays $0.002 per share in PFOF. The wholesaler fills you at $50.04.

• Your cost: 100 × $50.04 = $5,004.00, with $0 commission.
• Price improvement: $50.05 − $50.04 = $0.01 per share, or $1.00 on the order.
• Effective spread: 2 × ($50.04 − $50.025) = $0.03 per share.
• Broker’s PFOF: 100 × $0.002 = $0.20.

The broker earns 20 cents. You saved $1.00 against the posted ask. Measured from the midpoint, you paid $1.50 more than the “fair” value ($0.015 × 100 shares).

Now suppose a different routing choice would have filled you at $50.035. That fill would have cost $5,003.50, 50 cents less. The conflict-of-interest question is whether the broker had any incentive to prefer the first wholesaler over the second, and whether the gap between them persists across millions of orders. On one 100-share order the difference is tiny. Across a broker’s entire customer base it adds up, and the investor never sees the alternative fill.

The Same Logic in Options

Options show why the stakes are higher. Suppose an options contract is quoted at:

• Bid: $1.00
• Ask: $1.20
• Midpoint: $1.10

One contract normally covers 100 shares, so prices are multiplied by 100. If you buy one contract at the ask, you pay $120. Relative to the midpoint, that is $10 per contract, about 9% of the contract’s value. A fill at $1.15 would cut that to $5. With spreads this wide, a market maker has far more room both to pay the broker and to improve the price, and the investor has far more to lose from a mediocre fill.

Academic research has documented spreads of this size in practice. One study published in the Journal of Finance found that retail investors often chose weekly options with an average bid-ask spread of 12.6%.

Why Options Dominate PFOF Revenue

Equity and options PFOF work the same way in principle but differ sharply in size. For widely traded large-cap stocks, wholesalers can often fill retail orders inside the quoted spread, and PFOF per share is small. Options are a different business, for several reasons:

• Wider spreads. Option prices depend on volatility, time decay and the price of the underlying stock, so market makers quote wider spreads to cover their risk. Wider spreads mean more profit potential, which supports larger payments to brokers.
• Thinner trading. Many options series trade in low volume, so liquidity is scarcer and market makers can supply it at a premium.
• Risk management value. Options market makers commonly hedge their inventory in the underlying stock, and a large flow of retail orders helps them do that efficiently.

The difference shows up clearly in the 2022 study by economists Thomas Ernst and Chester Spatt, which used brokers’ Rule 606 reports. In their calculation, $1,000 invested in a stock priced at $100 generated about 20 cents of PFOF. The same $1,000 invested in an equity option priced at $10 generated about $4, twenty times as much. The ratio depends on the security and order size, so not every comparison is that extreme. The study also found that options accounted for about 65% of the PFOF brokers received in the period studied, stocks outside the S&P 500 about 30%, and S&P 500 stocks only about 5%, or $1 of every $20.

The study also associated PFOF-routed options execution with higher trading costs and wider spreads for retail options traders.

The Growth of Retail Options Trading

Retail participation in options rose sharply over the same period that zero-commission trading spread. Retail investors accounted for roughly a third of equity options volume around 2019, and estimates since then put their share at around half. One estimate put it at 45% in 2025. Retail options activity was already rising before that: one study found more than ten times as many retail equity options trades in 2020 as in 2010.

The timing does not prove that PFOF caused the boom. It does mean the PFOF debate is not mainly about pennies on blue-chip stock trades. It is about which products generate the most payment, and whether a broker’s incentives affect what customers trade.

The Less Visible Conflict

Most rules address the first conflict: whether a broker routes an order to the venue that pays it most instead of the one that fills it best. That conflict can be checked, because fills can be compared against posted quotes.

A second conflict is harder to see. If options and less liquid stocks pay brokers far more than S&P 500 shares, a broker has a financial reason to make those products prominent, easy to trade and heavily promoted in its app. Comparing fills against quotes cannot detect that kind of steering. Researchers have argued it may be the larger conflict, because the revenue gap between asset types is so much bigger than the gap between routing venues for the same trade.

How PFOF Is Regulated in the United States

The SEC has said PFOF can raise concerns about whether a firm is meeting its best-execution obligation to customers. It has never banned the practice. It relies on a combination of conduct rules and disclosure.

Best Execution

Broker-dealers must seek the most favorable terms reasonably available for customer orders. That duty comes from FINRA’s best-execution rule and broader securities law, not from PFOF rules specifically. Best execution looks at price, speed, likelihood of execution and other factors, with the NBBO serving as a key minimum price benchmark. Brokers must conduct and document regular reviews of execution quality across the venues they use. Receiving PFOF does not remove the duty. A broker that routes to the highest payer and accepts worse fills for customers can be in breach.

Regulation NMS

The SEC adopted Regulation National Market System in 2005 to modernize and link the US equity markets. Among other things, it formalized order protection around the NBBO framework, so that venues generally must not trade through better displayed prices elsewhere. The goal was competition among trading venues and better prices for investors. Regulation NMS also contains the disclosure rules most relevant to PFOF.

Rule 606: Routing and Payment Disclosure

Rule 606 requires brokers to publish reports showing where they route customer orders and what financial relationships they have with those venues. Brokers must also tell customers about their PFOF practices when an account is opened and again each year. A customer can ask a broker for the routing details of specific orders, and the broker may take up to seven business days to respond.

SEC amendments adopted in 2018, with related staff guidance updated in January 2020, made the reports more detailed. Brokers now have to disclose the net payments they receive each month from each venue, broken out by order type, and the payment per 100 shares for:

• market orders,
• marketable limit orders,
• non-marketable limit orders,
• other orders.

Rule 605: Execution Quality Disclosure

Rule 605 requires market centers (exchanges, over-the-counter market makers, alternative trading systems and similar venues) to publish monthly statistics on how well they execute orders. Rule 606 shows where orders go and what the broker is paid. Rule 605 shows how well the venues fill them.

In December 2022, the SEC proposed expanding Rule 605 to cover larger broker-dealers, those with 100,000 or more customer accounts, and to add more detailed measures, including time to execution in milliseconds, spread statistics measured 15 seconds and one minute after execution, and data on non-marketable orders that later became executable. The SEC adopted amendments to Rule 605 in March 2024.

Proposed Rule 615 and Its Withdrawal

The same December 2022 package included Rule 615, the Order Competition Rule. It would have required brokers to send many marketable retail orders into short auctions open to other market participants before internalizing them or routing them to a wholesaler. The idea was to make wholesalers compete order by order instead of through routing arrangements, which could have produced better prices for investors. The package also included a proposed SEC best-execution standard that would have required reasonable diligence to find the best market and most favorable terms. The Order Competition Rule drew heavy industry opposition and was withdrawn in 2025, so PFOF in the US continues under the disclosure and best-execution framework described above.

PFOF Outside the United States

European Union. Amendments to the Markets in Financial Instruments Regulation (MiFIR) entered into force on March 28, 2024 and prohibit brokers from receiving PFOF for executing client orders. Member states where the practice already existed could allow it during a transition period ending June 30, 2026. After that date the ban applies across the EU.

United Kingdom. The UK regulator has taken the position since 2012 that PFOF is unlikely to be compatible with its rules on conflicts of interest and inducements, and it has not been part of the UK retail model.

The difference matters for investors who use brokers in more than one jurisdiction. A commission-free app regulated in Europe cannot rely on the same revenue model as a US broker, so its costs may appear in other places, such as FX conversion fees, custody charges or wider spreads on its own pricing.

Benefits of Payment for Order Flow

The SEC allowed PFOF to continue because it judged that the benefits could outweigh the drawbacks. The arguments in favor are:

• Lower explicit costs. PFOF helps fund zero-commission trading. For a small investor, a fixed commission could once be a large share of a small trade.
• Wider access. Cheaper trading brought many new retail investors into the market.
• Price improvement. Wholesalers competing for retail flow often fill orders at better prices than the NBBO.
• Operational help for smaller brokers. A firm without the systems to route and execute large volumes efficiently can rely on wholesalers that do.
• Competition with exchanges. The SEC concluded that the practice could limit exchanges’ market power.

All of these benefits depend on one condition: the commission savings must exceed any cost from worse execution. If a customer loses more in wider effective spreads than the commission would have been, “free” trading costs more than a paid commission.

Criticisms and Controversies

Concentration Among Wholesalers

A small number of wholesalers handle most US retail stock order flow. Critics argue that this concentration limits the competition that is supposed to protect investors. In 2021, the SEC also raised concerns that so much retail flow executed off-exchange, out of sight of the wider market, could mean brokers and their customers were being overcharged. The Order Competition Rule was the SEC’s attempt to address that concern.

History

No one knows exactly when the first PFOF arrangement was made. Bernard Madoff, later convicted for running a massive investment fraud, was an early practitioner of paying for order flow in his market-making business, long before the fraud became known. In the late 1990s, some brokers offering commission-free trades routed orders to market makers that did not serve customers well, and traders found that their “free” trades cost more through poor prices.

The SEC traces the growth of PFOF in options to 1999, when options series began trading on more than one exchange at once. Exchanges then competed for order flow, including through rebates and incentive payments to brokers or customers who directed orders to them. After a detailed study of options PFOF and internalization, the SEC concluded that competition had narrowed spreads, and it allowed the practice to continue.

Recent Enforcement and Scrutiny

In December 2020, the SEC fined Robinhood $65 million for failing, in the late 2010s, to properly disclose the PFOF it received and for failing to seek best execution for its customers. The SEC found that the inferior fills cost customers more than they saved in commissions.

A year later, the SEC’s staff report on the January 2021 trading frenzy in GameStop and other meme stocks renewed the debate. It raised the concern that brokers paid by order volume have an incentive to encourage customers to trade more, for example through app design features that make trading feel like a game.

The revenue question has also drawn attention. Transaction-based revenue, of which PFOF is a large part, made up roughly three-quarters of Robinhood’s revenue in 2020 and 2021. In December 2023 its chief executive called PFOF a small part of revenue and said the issue had been politicized, while the company’s own risk disclosures said changes to the practice could have an outsized impact on its results and require significant changes to its business model. Its revenue has since diversified.

What PFOF Is Not

Several terms sit close to PFOF and are often confused with it.

PFOF vs. exchange rebates. Many exchanges use maker-taker pricing: they pay a rebate to firms that post resting orders and charge a fee to firms that take liquidity. A broker routing a limit order to an exchange may earn that rebate. This is a payment from an exchange based on the order type, not a payment from a wholesaler for the right to fill a broker’s customer flow. It creates its own routing incentives, but it is a different arrangement.

PFOF vs. internalization. Internalization means a firm fills a customer order from its own inventory instead of sending it to an exchange. Wholesalers internalize much of the retail flow they buy, and a broker-dealer can internalize its own customers’ orders without any third party. Internalization describes how an order is filled, and PFOF describes a payment for sending it.

PFOF vs. order flow analysis. In trading education, “order flow” also refers to studying the stream of buy and sell orders in a market, such as volume at each price, the order book and large prints, to judge short-term supply and demand. That is an analysis method and has nothing to do with brokers being paid. The wholesaler executing a broker’s customer orders sees each of those orders in real time, in a way no outside trader does, while the public sees only aggregate figures in Rule 605 and 606 reports.

PFOF vs. a dealing-desk forex or CFD broker. In retail forex and CFDs, a “market maker” broker usually takes the other side of client trades itself and earns from the spread and from net client positions. An agency or pass-through broker sends trades to liquidity providers and earns from markups or commissions. Neither is PFOF in the regulatory sense, because there is no exchange-listed security, no NBBO and no Rule 606 report. The underlying conflict is similar, though: when the firm pricing your trade also profits from how it is filled, the spread and execution quality matter as much as any advertised commission.

PFOF vs. a commission. A commission is a fee you pay and can see. PFOF is paid by someone else and is reflected, if at all, in your execution price. Switching from a commission broker to a PFOF broker moves the cost of trading from a line on your statement into the price of the trade.

How to Assess a Broker’s PFOF Practices

For a US stock or options account, the information is public but spread across several documents.

1. Read the broker’s Rule 606 report. It lists the venues that received your broker’s orders and the net payment per 100 shares or per contract by order type. Zero payment from the venues used means the broker does not take PFOF for those orders. High options payments show where its routing revenue comes from.
2. Check execution quality statistics. Many brokers publish price improvement figures, and Rule 605 reports from the venues show fill speed and effective spreads. Compare effective spreads as well as average price improvement, because large improvement on a wide quote can still mean a costly fill.
3. Compare total cost, not commission. Add commission, the expected effective spread and any other fees. A broker charging a small commission with better fills can be cheaper, particularly for options and larger orders.
4. Use limit orders where appropriate. A limit order does not stop the broker from routing to a paid venue, but it caps how far the fill can drift from the price you set.
5. Request order-level routing data if needed. You can ask your broker where specific orders were routed.

FAQs

The Bottom Line

US investors using commission-free brokers face this arrangement most directly, especially if they trade options, where PFOF payments are largest. Commission-free trading still has costs, because the bid-ask spread and fill quality depend on where orders go. Reading a broker's Rule 606 report, comparing effective spreads, and using limit orders where appropriate give a clearer picture of total trading cost than the advertised commission alone.