Payment for Order Flow (PFOF)
Compensation a broker receives for routing customer orders to a wholesaler, who fills them internally and pays the broker for the flow.
Payment for order flow (PFOF) is the practice where a retail broker sells its customers' marketable orders to a market-making wholesaler (such as Citadel Securities or Virtu) rather than routing them to a public exchange. The wholesaler internalizes the order, captures part of the bid-ask spread, and pays the broker a small per-share or per-contract rebate.
PFOF is what funds 'commission-free' trading in the U.S. The wholesaler is required to fill at or better than the NBBO and usually provides modest price improvement, so customers often get a fill that looks fair on screen. The criticism is conflict of interest: the broker is paid to route for revenue, not necessarily for the best possible execution.
PFOF is legal but heavily scrutinized — it is banned in the UK, EU, Canada, and Australia, and the SEC's order-execution disclosure rules (Rule 605/606) exist so traders can compare brokers' execution quality. For options, PFOF is larger and more entrenched than for equities.
Related Terms
Market Impact
The adverse price movement caused by your own order consuming liquidity — buying pushes price up, selling pushes it down.
AdvancedNBBO
The highest bid and lowest ask for a stock across all U.S. exchanges combined — the consolidated quote your broker must benchmark fills against.
IntermediatePrice Improvement
A fill at a better price than the prevailing NBBO — buying below the national ask or selling above the national bid.
IntermediateSmart Order Routing
Automated logic that scans multiple trading venues to find the best price, fee, and fill quality for each order.
AdvancedTaker
A trader whose order immediately executes against a resting limit, removing liquidity from the book and typically paying a fee.
Intermediate