GLOSSARY // Orders & Execution
Payment for Order Flow (PFOF)
Payment for order flow is money a wholesale market maker pays a brokerage for routing customer orders to it instead of to an exchange. It is the engine behind zero-commission trading: the broker charges you nothing because the wholesaler pays for the right to trade against your order.
The economics work because retail flow is safe to trade against — small, uninformed orders rather than institutional sweeps. Rates run on the order of $0.001-0.002 per share for stocks and roughly $0.40-0.50 per contract for options, which is why options order flow is the more valuable prize. Brokers must disclose these arrangements in quarterly SEC Rule 606 reports.
The wholesaler typically fills the order at or slightly inside the NBBO, booking the improvement as proof of execution quality. Critics argue the conflict is structural: the broker is paid by the counterparty to your trade, not by you.
A broker routes 10,000,000 option contracts to a wholesaler in a quarter at $0.45 per contract — $4,500,000 in PFOF revenue. A customer buying 5 contracts quoted $1.00 x $1.06 gets filled at $1.05, a $5.00 price improvement on the order, while the wholesaler keeps the rest of the spread.
Related terms
Educational only — not financial advice. Definitions simplified for clarity; markets are messier than definitions.