Payment for order flow is money a broker receives from a market maker or trading firm for sending customer trades to them instead of to an exchange

When you place a stock or options trade through your broker, that order has to go somewhere to be filled. Your broker can send it to a public exchange like the NYSE or NASDAQ, or to a private firm called a market maker that buys and sells securities on its own account. If your broker sends the order to a market maker instead of an exchange, that market maker often pays the broker a small amount per share or per contract. That payment is called payment for order flow, or PFOF.

The market maker profits because they can capture the bid-ask spread—the difference between what they pay to buy from you and what they charge to sell to you. They're willing to pay your broker a fraction of that spread to get your order, because they still make money on the rest of it. Your broker gets paid without charging you a commission, which is why many brokers advertise "commission-free" trading. You don't see the PFOF payment, but it's part of how the broker makes money from your trades.

Key Takeaways

  • Payment for order flow is a fee a market maker pays your broker for the right to fill your trade instead of sending it to a public exchange.
  • The market maker profits from the bid-ask spread, so they can afford to pay your broker and still make money on your trade.
  • You don't pay PFOF directly, but it may affect the price you receive because market makers can afford to offer slightly worse prices than exchanges and still profit.
  • The SEC requires brokers to disclose PFOF arrangements and to show that they are routing orders to get you the best price, not just the highest payment.
  • Some brokers offer the option to send orders to exchanges instead of market makers, usually for a small per-trade fee.

How the bid-ask spread connects to payment for order flow

Every stock or option has a bid price (what buyers will pay) and an ask price (what sellers want). The difference between them is the spread. On a heavily traded stock, that spread might be one cent per share. On a less liquid stock, it could be several cents.

A market maker buys at the bid and sells at the ask, pocketing the spread. If a market maker receives your order to buy 100 shares at the ask price of $50.05, and they bought those shares at the bid price of $50.04, they make $0.01 per share, or $1 total on your trade. They can afford to pay your broker $0.002 per share (or $0.20 on your 100-share order) and still profit $0.80. Your broker gets paid, the market maker profits, and you get filled—but you paid the full ask price instead of potentially getting a better price on an exchange.

The trade-off is speed and certainty. Market makers fill orders instantly and reliably. Exchanges can be slower during busy times, and there's no may provide your order will fill at all if the price moves. That's why brokers choose PFOF: it's profitable and it keeps customers happy with fast fills.

What the SEC requires brokers to disclose about PFOF

The SEC does not ban payment for order flow, but it requires brokers to disclose it. Your broker must tell you in writing that they receive PFOF and must show you which market makers they route orders to. Many brokers include this information in their account agreements or on a separate disclosure page.

Brokers must also follow a rule called best execution. This means they have to route your order in a way that gets you the best overall price and execution, not just the highest payment to themselves. If a broker consistently routes orders to a market maker that offers worse prices than an exchange, the SEC can take action. In practice, this means brokers must balance PFOF income against the duty to get you a fair price.

The SEC has increased scrutiny of PFOF in recent years. In 2023, the agency proposed new rules that would require brokers to prove they are not routing orders based on payment alone. Some brokers have voluntarily stopped accepting PFOF or have given customers the option to opt out, though opting out usually means paying a small per-trade fee instead.

How PFOF affects the price you pay or receive

The effect on your price is usually small but real. If you buy a stock, you might pay a fraction of a cent more per share than you would on an exchange. If you sell, you might receive a fraction of a cent less. Over a single trade, this might be $0.10 to $1.00 on a typical order. Over hundreds of trades per year, it adds up.

The impact is larger on less liquid securities. Thinly traded stocks and options have wider spreads, so market makers have more room to pay your broker and still profit. On a stock with a 10-cent spread, a market maker can afford to pay your broker more and still offer you a price that looks competitive compared to the exchange.

The impact is also larger if you trade options. Options spreads are wider than stock spreads, and PFOF is more common in options trading. If you trade frequently or in large size, the cumulative cost of PFOF can be significant enough to matter when you compare brokers.

Brokers that accept PFOF versus those that don't

Most large retail brokers—including Robinhood, Charles Schwab, Fidelity, and TD Ameritrade—accept payment for order flow on at least some of their trades. They disclose this in their account agreements and on their websites. Some brokers, like Interactive Brokers, have historically routed more orders to exchanges and accepted less PFOF, though they still participate in the practice.

A small number of brokers market themselves as PFOF-free or offer customers the choice. If you want to avoid PFOF entirely, you can usually do so by paying a per-trade fee—typically $0.50 to $1.00 per order—to have your trade routed to an exchange instead. Some brokers offer this as an option in your account settings; others require you to call or email to request it.

The choice between PFOF and per-trade fees depends on your trading volume and style. If you trade once or twice a month, paying $1.00 per trade adds up quickly. If you trade dozens of times per month, the cumulative cost of PFOF might exceed the per-trade fee. Compare the math for your own situation before deciding.

The difference between PFOF and rebates

Payment for order flow is sometimes confused with exchange rebates, but they are different. An exchange rebate is money an exchange pays a broker for sending high-volume orders to it. A market maker payment is money a market maker pays a broker for sending orders to them instead of to an exchange. Both reduce the broker's costs, but they come from different sources and reflect different routing decisions.

Some brokers receive both rebates and PFOF payments, depending on which orders go where. A broker might route large institutional orders to an exchange to earn rebates, and small retail orders to a market maker to earn PFOF. The SEC requires brokers to disclose both types of payments.

Why brokers prefer PFOF over charging you commissions

Before the 2010s, most brokers charged per-trade commissions—typically $5 to $10 per stock trade and $0.50 to $1.00 per options contract. Brokers made money directly from you. Today, most retail brokers have eliminated commissions and instead rely on PFOF, interest on cash balances, and other sources of revenue.

PFOF is more profitable for brokers than commissions were, and it's invisible to customers. You see a $0 commission and think you're getting a good deal, but you're paying indirectly through a slightly worse price. Brokers prefer this because customers are less likely to shop around based on a hidden cost than on a visible commission.

This shift has made trading more accessible to small investors—you can open an account and trade without worrying about commission costs—but it has also created a conflict of interest. Your broker profits more if you trade more, and profits more if they route your orders to market makers that pay them the most, not necessarily to the place that gives you the best price.

Frequently Asked Questions

Does payment for order flow cost me money?

Not directly—you don't see a PFOF charge on your statement. But indirectly, yes: you may pay a slightly higher price when you buy or receive a slightly lower price when you sell, because the market maker needs to profit from the spread after paying your broker. The cost is usually small per trade but adds up over time.

Can I opt out of payment for order flow?

Many brokers allow you to opt out by requesting that your orders be routed to exchanges instead of market makers. This usually costs $0.50 to $1.00 per trade. Check your broker's website or account settings, or contact customer service to ask whether this option is available and what it costs.

Is payment for order flow illegal?

No. The SEC permits PFOF as long as brokers disclose it and follow best execution rules. However, the SEC has increased oversight of PFOF in recent years and has proposed stricter rules. Some brokers have voluntarily reduced their reliance on PFOF in response to regulatory pressure.

Do all brokers use payment for order flow?

Most large retail brokers do, but not all. Some brokers route more orders to exchanges and accept less PFOF. If avoiding PFOF is important to you, research your broker's routing practices in their account agreement or contact them directly to ask.

Does payment for order flow affect options trades differently than stock trades?

Yes. Options spreads are wider than stock spreads, so market makers have more room to pay your broker and still profit. This means PFOF is more common and potentially more costly in options trading. If you trade options frequently, comparing brokers' routing practices is especially important.