Payment for Order Flow: What It Is and Why It Matters

You've probably seen a line in your broker's fee schedule that says something like “zero‑commission trades.” The secret behind that zero price is often payment for order flow (PFOF). In simple terms, PFOF is a deal where a broker sends your trade to a market maker, and the market maker pays the broker a small fee for the order.

That fee can be just a few cents per share, but when you add up thousands of trades, it becomes a sizable revenue stream for discount brokers. The arrangement sounds win‑win: you get free trades, the broker gets paid, and the market maker gets order flow that helps them manage risk and profit from the spread.

How the Money Moves

When you click “buy” or “sell,” the broker routes the order to a liquidity provider—usually a high‑frequency market maker. The market maker fills the order at the best available price, then sends a payment back to the broker. This is the payment for order flow. It’s not a hidden charge on your trade; it’s a separate compensation that the broker reports to regulators.

Because the broker isn’t charging you a commission, the PFOF fee shows up in the broker’s earnings report rather than your account statement. That’s why your trade confirmation still says “zero commission.”

Pros and Cons for Traders

On the plus side, PFOF has democratized market access. Retail investors can now trade stocks and options without worrying about per‑trade fees, which encourages more participation and learning.

On the downside, the practice can create conflicts of interest. A broker might favor the market maker that pays the highest fee, even if that venue offers a slightly worse price for your order. Critics say this can lead to “price‑improvement” gaps, where you lose a few pennies per share compared to a true best‑execution scenario.

Regulators like the SEC require brokers to disclose PFOF arrangements and to demonstrate that they are still seeking the best execution for clients. Many brokers publish monthly transparency reports that break down how much they earned from PFOF and how often they got price improvement.

If you want to keep an eye on the impact, compare the execution price you receive with the quoted market price at the time of the trade. A few cents difference isn’t huge, but over many trades it adds up.

Another practical tip: some brokers let you opt out of PFOF routing for a small commission fee. If you’re a high‑volume trader, that might actually save you money in the long run.

Bottom line: payment for order flow isn’t a scam, but it’s a trade‑off. You get free trades, but you give up a tiny edge on execution price. Understanding how it works helps you decide whether a zero‑commission broker fits your style or if you’d rather pay a modest fee for tighter fills.

So next time you place a trade, remember the silent payment happening behind the scenes. Ask your broker about their PFOF policy, check their transparency reports, and decide if the convenience outweighs the minor cost. Knowledge is the best tool to keep your investments on the right track.