Payment for Order Flow
The core economic mechanism of the zero-commission brokerage model, in which market makers pay brokers for routing priority on retail order flow. It is subject to regulatory controversy owing to conflicts of interest and implicit costs.
Timeline (last 90 days)
Zero-commission trading has become mainstream, with broker-dealers' revenue relying more on payment for order flow (PFOF) and spread businesses.
Payment for order flow (PFOF) works as follows: market makers pay retail broker-dealers fees in exchange for the priority of having retail orders routed to their platforms for execution.
The US SEC proposed a draft rule in 2021 to comprehensively ban PFOF, but it met strong opposition from the brokerage industry.
The EU adopted the revised Markets in Financial Instruments Directive (MiFID II) in 2024 to gradually restrict PFOF.
The UK has long banned payment for order flow (PFOF).
PFOF creates a serious conflict of interest: broker-dealers have an incentive to route orders to the market makers paying the highest fees rather than to the platforms providing the best execution quality, which essentially shifts costs from explicit commissions to implicit spreads.
All Facts (6)
Zero-commission trading has become mainstream, with broker-dealers' revenue relying more on payment for order flow (PFOF) and spread businesses.
50%UnverifiedPayment for order flow (PFOF) works as follows: market makers pay retail broker-dealers fees in exchange for the priority of having retail orders routed to their platforms for execution.
50%UnverifiedThe UK has long banned payment for order flow (PFOF).
50%UnverifiedPFOF creates a serious conflict of interest: broker-dealers have an incentive to route orders to the market makers paying the highest fees rather than to the platforms providing the best execution quality, which essentially shifts costs from explicit commissions to implicit spreads.
50%UnverifiedThe US SEC proposed a draft rule in 2021 to comprehensively ban PFOF, but it met strong opposition from the brokerage industry.
50%UnverifiedThe EU adopted the revised Markets in Financial Instruments Directive (MiFID II) in 2024 to gradually restrict PFOF.
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