Payment for order flow.
In plain English
Payment for order flow is a rebate a market maker pays a broker in exchange for routing customer orders to it rather than to an exchange. The wholesaler wants retail orders because they are small and less likely to be trading on information the wholesaler lacks. Brokers are still required to seek best execution, and they must disclose their routing arrangements and the payments they receive. The open question is whether the price improvement customers get fully offsets the value of the flow being sold. It is the main reason a trade can cost zero commission and still not be free.
01Why it matters
Zero commission does not mean zero cost, and the difference shows up in the execution price rather than on your statement, where it is hard to notice.
02The math, step by step
Say the public quote is 20.00 bid and 20.02 ask and a wholesaler fills your buy at 20.015. You saved half a cent a share against the ask, 0.50 dollars on 100 shares. The broker may collect a fraction of a cent per share for sending the order there.
Illustrative example. The amounts here are hypothetical, chosen to show how the math works, not real quoted rates or figures.
03What this is NOT
It is not front running. Front running means trading ahead of a customer's order for the firm's own benefit and is prohibited. Payment for order flow is a disclosed routing arrangement. Whether it serves customers well is a fair argument, but it is not the same conduct.
04Receipts
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Plain-English answers from our glossary. Receipts included. Never advice.
Educational tool. Answers come only from ClearMoneySchool's published glossary and are not advice. Why we never give advice