Payment for Order Flow (PFOF): How Brokers Make Money on Free Trades

What Is Payment for Order Flow?

Payment for order flow (PFOF) is a business arrangement between stock brokers and market makers. When you place a trade through Robinhood, Schwab, TD Ameritrade, or most other retail brokers, your order does not go directly to the NYSE or Nasdaq. Instead, the broker sends it to a market maker — a firm that takes the other side of your trade.

The market maker pays the broker for the right to fill your order. This payment typically ranges from $0.001 to $0.004 per share for equities and significantly more for options. In return, the market maker profits from the spread between the bid and ask prices.

This is how commission-free trading works. Before PFOF became widespread, retail traders paid $5-$10 per trade in commissions. Brokers like Robinhood pioneered the PFOF model, eliminating commissions and monetizing order flow instead. By 2025, virtually every major retail broker uses PFOF for at least some order types.

How the Money Flows

The PFOF transaction chain involves three parties: you, your broker, and the market maker.

1. You place a buy order for 100 shares of AAPL at $185 through your broker.
2. Your broker routes the order to a market maker — say Citadel Securities — instead of sending it to a public exchange.
3. Citadel Securities fills your order at $184.99 (one cent better than the $185 ask on the exchange) and pays your broker $0.002 per share ($0.20 total).
4. Citadel profits from the difference between the price they pay you and the price at which they offset the risk — often fractions of a penny per share, multiplied across millions of daily orders.

The broker earns $0.20 on this trade. Multiply that by millions of trades per day across millions of customers, and PFOF generates hundreds of millions in annual revenue. Robinhood reported $813 million in PFOF revenue in 2021 during the meme stock era. Schwab, Fidelity, and E*TRADE also collect substantial PFOF — though Fidelity routes equity orders to its own affiliated market maker.

Who Are the Market Makers?

Two firms dominate the PFOF market maker space:

Citadel Securities handles roughly 25-30% of all U.S. equity volume and an even larger share of retail order flow. It is the largest designated market maker on the NYSE and processes billions of dollars in trades daily. Citadel Securities is a separate entity from Citadel the hedge fund, though both are founded by Ken Griffin.

Virtu Financial is the second-largest player, known for posting a loss on only one trading day across several years — a testament to the profitability and consistency of market making at scale.

Other significant market makers include Wolverine Trading, Two Sigma Securities, and G1 Execution Services (formerly E*TRADE's market-making arm).

These firms invest billions in technology infrastructure — co-located servers, low-latency networks, and proprietary algorithms — to execute trades in microseconds. Their speed advantage allows them to manage inventory risk and extract consistent profits from the bid-ask spread.

Price Improvement: The Counterargument

Proponents of PFOF argue it benefits retail traders through price improvement — executing your order at a slightly better price than the best publicly displayed quote.

If the national best bid for AAPL is $184.98 and the best ask is $185.02, the spread is $0.04. A market maker might fill your buy order at $185.00 — saving you $0.02 per share compared to the ask. On 100 shares, that is $2 in price improvement.

SEC data shows that the average price improvement for retail equity orders is approximately $0.01 to $0.02 per share. On a typical 100-share order, that is $1-$2 in savings. Over thousands of trades per year, this adds up.

However, critics raise a key question: would spreads be even tighter — and price improvement even greater — if all retail orders went to public exchanges where they would compete openly? The answer is genuinely uncertain. Market structure experts disagree, and the SEC has spent years studying the question.

The Controversy

PFOF has faced increasing scrutiny from regulators, academics, and market participants. The main criticisms:

Conflict of interest. Brokers have a financial incentive to route orders to the market maker paying the most, not the one providing the best execution. If Market Maker A pays $0.003/share but fills at worse prices, and Market Maker B pays $0.001/share but fills at better prices, the broker profits more from routing to A — even though B is better for the customer.

Information asymmetry. Market makers see retail order flow before it hits public exchanges. This gives them a microscopic but consistent informational edge. They know whether retail traders are net buying or net selling, which can inform their own positioning. Critics call this "trading against" retail flow, though market makers argue they provide liquidity, not adversarial trading.

The GameStop incident. During the January 2021 GameStop short squeeze, Robinhood restricted buying of GME and other meme stocks. While Robinhood cited clearing requirements, the incident intensified scrutiny of the PFOF model and the relationship between Robinhood and Citadel Securities. Congressional hearings followed, and the SEC began exploring reforms.

International bans. The UK, Canada, and Australia have banned or severely restricted PFOF. The European Union banned it effective 2026. Proponents of these bans argue that PFOF obscures true execution costs and fragments liquidity away from public exchanges.

How PFOF Affects Your Trading

For the average retail trader buying 100 shares of a large-cap stock, PFOF's direct impact is minimal — perhaps $1-$3 per trade in price improvement versus what you would receive on a public exchange. The savings from zero commissions far exceed any execution quality differences.

Where PFOF matters more:

• Options trading. PFOF payments on options are significantly higher than equities, and options spreads are wider. The slippage on poorly filled options orders can cost $5-$50 per contract.
• Large orders. A 10,000-share order routed to a market maker may receive worse execution than the same order on a public exchange where it interacts with more liquidity. Professional traders and institutions typically avoid PFOF brokers for this reason.
• Trading commissions comparison. PFOF replaces explicit commissions with implicit costs. Whether you are better off depends on your order sizes, frequency, and the specific stocks you trade.

The SEC and Potential Reform

The SEC under Chair Gary Gensler (2021-2025) considered proposals to reform or ban PFOF in the U.S. Key proposals included:

• Order-by-order competition. Requiring retail orders to be exposed to open auction before a market maker can fill them, potentially producing better prices.
• Enhanced disclosure. Requiring brokers to show customers the exact PFOF revenue generated from their specific orders.
• Minimum price improvement standards. Setting a floor for the price improvement market makers must provide to justify internalizing orders.

As of 2026, PFOF remains legal in the U.S., but regulatory pressure continues. Any future ban would force brokers to find alternative revenue models — likely reintroducing some form of commission or expanding revenue from margin lending, securities lending, and premium subscriptions.

Frequently Asked Questions

Does PFOF mean my broker is selling my trades?

Essentially, yes. Your broker sells the right to execute your order to a market maker. The market maker pays for this access because retail order flow is predictable and profitable to trade against. Whether this harms you depends on the quality of execution you receive. In most cases, the price improvement you get combined with zero commissions results in a net benefit for small retail orders.

Which brokers use PFOF?

Nearly all major U.S. retail brokers participate in PFOF to some degree. Robinhood, Schwab, TD Ameritrade, E*TRADE, and Webull all receive PFOF. Fidelity is a partial exception — it routes many equity orders to its own affiliated market maker (Fidelity Capital Markets) and does not accept PFOF on equity orders, though it does on options. Interactive Brokers offers a "Pro" account that routes to exchanges directly, avoiding PFOF.

Should I worry about PFOF as a retail investor?

For buy-and-hold investors purchasing index funds or blue-chip stocks in moderate quantities, PFOF has negligible impact. The zero-commission model saves you more than any execution quality difference costs. For active traders placing hundreds of orders per month, especially in options, execution quality matters more — consider brokers with transparent routing and review their order fill statistics carefully.