PFOF

Payment for Order Flow — the practice where brokerages receive compensation from market makers for routing customer orders to them, rather than to exchanges or other venues.

Payment for order flow (PFOF) is how "commission-free" retail brokers are actually compensated for executing customer trades. Rather than charging commissions, brokers like Robinhood send customer orders to market makers like Citadel Securities or Virtu Financial, who pay the broker a small fee per share or contract for the order flow. The market maker then executes the trade, profiting from the bid-ask spread.

The controversy around PFOF centers on conflicts of interest and execution quality. Critics argue that brokers have an incentive to route orders to whoever pays the most, not whoever provides the best execution price for customers. The SEC has documented cases where PFOF arrangements led to retail customers receiving inferior prices compared to what they would have gotten on exchanges — particularly in options, where spreads are wide and the potential for "price improvement" (getting better than the posted price) is significant.

Proponents argue that PFOF enabled commission-free trading that democratized market access for retail investors, and that market makers bound by regulation do provide price improvement relative to exchange quotes. The SEC has proposed Rule 605 amendments and considered banning PFOF outright; the debate continues. Options traders are more directly affected than stock traders because options spreads are wider, making the execution quality question more financially significant per trade.

This definition is for informational and educational purposes only. Nothing on Finance Compass constitutes financial, investment, or trading advice. Always conduct your own research and consult a qualified professional before making financial decisions.