Source: Fox Business
Payment for order flow has been a hot topic for quite some time due to the retail army of investors being unhappy with market makers creating an unfair advantage to those who control the marketplace.
You might be asking what payment for order flow is? Payment for order flow or PFOF for short is as defined on investopedia as:
Payment for order flow (PFOF) is the compensation, usually fractions of a penny per share, that a brokerage firm receives for directing orders for trade execution to a particular market maker. The options market is dominated by market makers with the financial resources to meet market making’s considerable risks and liquidity requirements. Payment for order flow is common for options transactions, typically averaging less than $0.50 per contract traded.
In the old days of trading stocks there was commissions which would set back investors a few bucks per trade. And although now in 2022 there are “Free” brokers should as Robinhood, it bears the question… How “Free” are they?
Robinhood makes money by the following as defined on investopedia: Robinhood is an online discount brokerage that offers a commission-free investing and trading platform. The company gets the vast majority of revenue from transaction-based revenues, including payments for order flow.
As you see above, they make money from each and all transactions users of the platform make. So once again… It isn’t truly “Free” now is it.
With the SEC now considering banning payment for order flow because of potential “conflicts of interest” it has the brokers who use this practice frantically trying to figure out a new way to stay afloat if and when this practice is banned by the SEC.
Retail traders are asking for a free, fair, transparent way to trade in the stock market which is far from what they have to use as of now.