Explainer · Costs & Regulation
Payment for order flow, explained
When a broker charges you no commission, it still has to earn money somewhere. One of those places is payment for order flow: a trading firm pays your broker for the right to fill your order.
Quick answer
Payment for order flow (PFOF) is money a market maker pays your broker for sending it your orders. The SEC says these payments can create a conflict of interest for the broker [1]. An EU regulation adopted in 2024 says firms should be prohibited from receiving it [5].
Key points
- A market maker pays your broker for the right to trade with your order; that payment is payment for order flow [1].
- Zero commission does not mean free: FINRA says free trading does not mean free investing [4].
- The conflict: market makers may let the broker choose between better prices for you and more payment for itself [1].
- The EU moved from a 2021 warning [2] to a 2024 prohibition with national exemptions allowed until 30 June 2026 [5].
- Judge a broker by the full price you get, including the spread, not by the commission line alone.
On this page
What is payment for order flow?#
When you press buy or sell in a broker's app, your order does not go straight to a stock exchange. The broker decides where to send it. Often it goes to a wholesale trading firm called a market maker, which buys from or sells to you itself.
The SEC's 2021 staff report describes the deal plainly: off-exchange market makers typically pay the retail broker for the right to trade with its customers' orders, and this is payment for order flow [1]. ESMA, the EU markets regulator, uses a similar definition: brokers receiving payments from third parties for directing client orders to them [2]. An older SEC investor page put the size of these payments at perhaps a penny or more per share [3].
The last step is the one that matters for you. The SEC report explains that market makers may let the broker decide how the value is split: some or all of it can go into better prices for customers, or the broker can keep part of the payment [1].
Why do zero-commission brokers use it?#
Because commissions were a main source of income, and something had to replace them. The SEC report notes that while retail brokers reduced commissions, some kept or increased other sources of revenue, and it lists payment for order flow first [1]. FINRA, the US brokerage self-regulator, puts the point in one line: free trading is a way to attract customers, but free trading does not mean free investing [4].
| Revenue source | Where it comes from | Named by |
|---|---|---|
| Payment for order flow | Market maker that fills your order | SEC staff report 2021 [1] |
| Interest on margin loans | You, when you borrow to trade | SEC 2021 [1] and FINRA [4] |
| Interest on cash balances | Your uninvested cash | SEC staff report 2021 [1] |
| Securities lending | Borrowers of shares the broker lends | SEC staff report 2021 [1] |
| Advisory or robo fees | You, for managed accounts | SEC 2021 [1] and FINRA [4] |
Not every broker uses every source. Ask your broker which apply to your account.
None of these is hidden in a legal sense, but they are easy to miss because they do not appear as a fee on your trade confirmation. Our explainer on how brokers make money covers the wider picture.
Where is the conflict of interest?#
The SEC staff say it directly: these payments can create a conflict of interest for the retail broker [1]. ESMA describes the mechanism: payment for order flow gives the firm an incentive to choose the third party paying the most, rather than the best possible outcome for its clients [2].
The SEC report gives a concrete case. It cites an SEC enforcement matter in which Robinhood took roughly a 20/80 split of the value between price improvement and payment for order flow, compared with the typical 80/20 rate that trading firms paid other retail brokers [1].
Does payment for order flow mean you get a worse price?#
Not necessarily, and our sources do not claim that it always does. What they say is that the broker has a reason to weigh its own payment against your price. The SEC's investor page on trade execution says your broker has a duty to seek the best execution reasonably available for customer orders [3].
Price improvement is real when it happens. The SEC's own example: you place a market order to sell 500 shares quoted at $20. If it fills at $20.05, you receive $10,025.00, which is $25.00 more than at the quote [3]. For comparison, a payment of one cent per share on those 500 shares would be $5.00 (calculated).
- SEC staff report
- 14 Oct 2021describes PFOF and the conflict [1]
- Typical split cited
- 80/20price improvement / PFOF [1]
- ESMA warning
- 13 Jul 2021PFOF unlikely to fit MiFID II in most cases [2]
- EU exemption limit
- 30 Jun 2026last date a member state could exempt its firms [5]
- SEC price improvement example
- $25.00500 shares at $20.05 instead of $20 [3]
Also remember that the price you see on screen is only good for a set number of shares, so you may not get exactly that price [3]. The gap between the buying and selling price, the bid-ask spread, is a cost you pay on every round trip whatever the commission says [6].
How do the US and the EU treat payment for order flow?#
They have taken different paths. The SEC report from October 2021 describes the practice and its conflict but does not ban it [1]. The SEC's 2013 investor page adds that brokers that route orders must disclose, every quarter, the market centres to which they send a significant share of their orders [3].
In the EU, ESMA said in July 2021 that in most cases receiving payment for order flow was unlikely to be compatible with MiFID II, the EU's investment services rules [2]. Then Regulation (EU) 2024/791, adopted on 28 February 2024, stated that investment firms should be prohibited from receiving such payments for routing retail client orders [5]. It let a member state where the practice already existed exempt its own firms, for clients in that country, until 30 June 2026 [5].
| Jurisdiction | What the source says | Source date |
|---|---|---|
| United States | Practice described; broker must seek best execution and disclose routing quarterly | 2013 [3] and 2021 [1] |
| European Union (2021) | ESMA: unlikely to be compatible with MiFID II in most cases | July 2021 [2] |
| European Union (2024) | Firms should be prohibited from receiving it; exemptions possible until 30 June 2026 | February 2024 [5] |
| Other countries | Not covered by our sources | Check your regulator |
Rules change. Our sources do not cover the UK, Australia or later US proposals.
How can you check how your broker gets paid?#
- Ask the question directly
FINRA encourages investors not to be shy about asking professionals how they are paid [4]. Ask whether the broker receives payment for routing your orders.
- Find the routing disclosure
In the US, brokers publish quarterly reports on where they route orders [3]. Look for it in the legal or disclosures section of the broker's website.
- Compare fill prices with quotes
Note the quote when you place an order and the price you actually got. Over many trades this shows whether you tend to receive price improvement.
- Count every cost
Add the spread, any commission and any financing. Our trading cost calculator does the arithmetic for one trade.
- Check the broker is regulated
Rules on conflicts only protect you if the firm is supervised. See how to check if a broker is regulated.
Mistakes beginners make with payment for order flow#
- Treating zero commission as zero cost
The spread, financing and other revenue sources still cost you money. FINRA's line is that free trading does not mean free investing [4].
- Assuming every fill is a bad fill
Our sources show the conflict, not proof that every order is worse off. Price improvement does happen [3]. Judge by your own fill records.
- Ignoring how many trades you make
Small per-order amounts add up over many trades. A habit of frequent trading multiplies every hidden cost.
- Reading old rules as current
The EU position changed between 2021 and 2024 [5]. Check the date of any rule you read, including on this page.
Frequently asked questions#
Is payment for order flow illegal?
Why would a market maker pay for my order?
Does payment for order flow affect crypto apps?
Our sources do not cover how crypto platforms earn money, so we cannot say. Ask the platform directly how it is paid and compare the price you get with the market price at the same moment.
What is price improvement?
Getting a better price than the quote shown when you placed the order. In the SEC example, selling 500 shares at $20.05 instead of $20 earns $25.00 more [3].
The bottom line#
Payment for order flow is how many zero-commission brokers are paid: a market maker pays the broker for your orders. The SEC calls it a possible conflict of interest [1], and the EU has moved to prohibit it [5]. You cannot see the payment on your trade, so look at what you can see: the price you get, the spread and every other fee. Use the trading cost calculator before you trade, and read our risk disclosure.
Sources
- Staff Report on Equity and Options Market Structure Conditions in Early 2021.
- ESMA warns firms and investors about risks arising from payment for order flow.
- Trade Execution: What Every Investor Should Know.
- Fees and Commissions | FINRA.org.
- Regulation (EU) 2024/791 of the European Parliament and of the Council of 28 February 2024 amending Regulation (EU) No 600/2014.
- Bid Price/Ask Price | Investor.gov.
- Customer Advisory: Eight Things You Should Know Before Trading Forex.
Education only. This page is not investment, tax or legal advice. Trading and crypto can lose you money. See our risk disclosure.
