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
NBBO
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.
IntermediateTaker
A trader whose order immediately executes against a resting limit, removing liquidity from the book and typically paying a fee.
Intermediate