Payment for order flow (PFOF) is the compensation that a stockbroker receives from a market maker in exchange for the broker routing its clients' trades to that market maker.[1] It is a controversial practice that has been called a "kickback" by its critics.[2] Policymakers supportive of PFOF and several people in finance who have a favorable view of the practice have defended it for helping develop new investment apps, low-cost trading, and more efficient execution.[3][4]
In general, market makers like Citadel LLC, Virtu Financial, and Susquehanna International Group are willing to pay brokers for the right to fulfill small retail orders. The market maker profits from the bid-ask spread and rebates a portion of this profit to the routing broker as PFOF. Another fraction of a penny per share may be routed back to the consumer as price improvement.[5][6] Brokers in the United States that accept payment for order flow include Robinhood, E-Trade, Ally Invest, Webull, TradeStation, Charles Schwab Corporation, Public.com, and TD Ameritrade, while brokers that do not receive payment for order flow include Interactive Brokers (pro accounts that are charged commissions), Merrill Edge, Fidelity Investments, Vanguard.[7]
In the United States, accepting PFOF is allowed only if no other exchange is quoting a better price on the National Market System. The broker must disclose to the client that it accepts PFOF. Transactions must be executed at the best execution, which could mean the best price available or the speediest execution available.[1]
In Canada, PFOF is not allowed on Canadian listed securities,[5] so Canadian brokers charge commissions,[8] however, according to the current Canadian securities regulations, brokers can accept PFOF on non-Canadian listed securities.[9] It is also banned in the United Kingdom.[5][10] According to Euronext, European authorities have regulated payment for order flow, and the practice is allowed in a number of national jurisdictions across Europe.[11]
^ ab"Payment for Order Flow". U.S. Securities and Exchange Commission.
^McMillan, Alex Frew (May 20, 2020). "Q&A: Madoff talks trading". CNN. Archived from the original on 17 August 2020.
^Franck, Thomas. "GOP Senator Toomey debuts bill to protect broker revenues, payment for order flow". CNBC. Retrieved 2023-04-06.
^"Virtu boss defends payment for order flow after Reddit frenzy". Financial Times. 2021-02-11. Retrieved 2023-04-06.
^ abcMcCrank, John (October 8, 2019). "U.S. online brokers still profiting from 'dumb money'". Reuters.
^Massa, Annie (March 9, 2017). "Payment for order flow". Bloomberg News.
^Houston, Rickie (March 24, 2021). "How to find out if your investing app sells your trades to make a profit". Business Insider.
^Saminather, Nichola (February 9, 2021). "Canada stock market rules curb platforms linked to churning U.S. stocks". Reuters.
^Ma, Baggio (January 10, 2023). "Payment for Order Flow (PFOF) in Canada". PiggyBank. Retrieved January 27, 2023.
^"PAYMENT FOR ORDER FLOW: Internalisation, Retail Trading, Trade-Through Protection, and Implications for Market Structure". CFA Institute. July 2016.
^"The rise of retail: new investment tactics and execution quality". www.euronext.com. February 15, 2021.
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