Payment for order flow is controversial because while traders using Robinhood get some amount of what’s known asprice improvement, they may not get the best possible price. This usually amounts to cents, or even fractions of a cent, per share, but as you can see from Robinhood’s revenue, all those tiny amounts of money add up pretty quickly.
People also ask
What is payment for order flow and why does it matter?
In the wake of the GameStop short squeeze, payment for order flow鈥攖he practice of market makers paying brokers to execute customer orders鈥攈as fueled no small amount of debate: Is it a tactic deployed by large capital markets institutions to steal money from the less informed, or is it an enabler of low cost, highly efficient stock trading for all?
Should brokers get paid for order flow?
Supporters of payment for order flow say all parties can win. Here’s how it works: A broker sends a commission-free retail trade to a wholesaler or market maker. It does this instead of sending trades to the traditional stock exchanges because market makers say they can provide better prices.
What is PFOF (pay for order flow)?
Even in a commission-free model, a brokerage is paying for that trade somewhere in their operating expenses. But for many brokerages, that fee is covered in something called a payment for order flow (PFOF). PFOF became a part of mainstream financial literacy in early 2021 when the market criticized some brokerages for their financial practices.
Why the pushback on payment for order flow?
The pushback on payment for order flow is proof that we don鈥檛 have to take stock market norms at face value. As a community, investors on the Public app are able to tip on their own accord, or save the funds while they execute trades directly with the exchange.