Definition
Payment for Order Flow is the practice where brokers receive compensation from market makers for directing retail orders to them. This enables commission-free trading but raises concerns about execution quality. Critics argue PFOF creates conflicts of interest; supporters say retail traders still get good prices.
Example
A broker receives $0.003 per share from a market maker for routing orders. The broker offers commission-free trading as a result.
FAQ
What is Payment for Order Flow (PFOF)?
Compensation brokers receive for routing orders to specific market makers.
Why is Payment for Order Flow (PFOF) important?
Payment for Order Flow (PFOF) helps investors evaluate trading mechanics and make more informed decisions.