What is payment for order flow and why does it matter?

#What is payment for order flow, in plain words?

When you press 'buy' in a trading app, your broker (the firm that holds your account) has to send that order somewhere to be filled: an exchange, or a trading firm that buys and sells shares all day, often called a market maker or wholesaler. Some of those firms pay brokers to send them orders. That payment is payment for order flow, or PFOF. The SEC's investor guide puts it simply: some exchanges or market makers "will pay your broker for routing your order to that exchange or market maker—perhaps a penny or more per share for your order"⁠^[1].

US rules define it broadly. Under the SEC's confirmation rule, payment for order flow means any monetary payment, service, property or other benefit a broker receives in return for routing customer orders to another firm or venue for execution, including things like rebates, research or reciprocal order-flow deals⁠^[2]. So it is not only cash. A related practice is internalisation, where the broker fills your order from its own firm's inventory and may earn the difference between buying and selling prices, known as the spread⁠^[1].

#How does an order travel when PFOF is involved?

Why would a trading firm pay for your order? Market makers earn from the spread between the price at which they buy and the price at which they sell. Orders from individual investors are attractive to them, so they compete for that flow. An SEC staff working paper summarises the model this way: wholesalers pay retail brokers to send them their clients' orders and usually trade against those orders from their own inventory. It notes that supporters say PFOF makes low or no-commission trading possible, often with fills slightly better than the best public quote⁠^[3]. That paper reflects its authors' views, not the Commission's.

#Why is PFOF a conflict of interest?

Your broker is supposed to get you a good price. If it is also paid by the firm it sends your orders to, it has a reason to pick the firm that pays most. The UK's former regulator, the Financial Services Authority, put it bluntly in 2012: PFOF arrangements "create a clear conflict of interest between the clients of the firm and the firm itself"⁠^[4]. Supporters argue that competition between market makers can still give customers prices better than the public quote. Both things can be true at once, which is why the rules focus on disclosure and on checking execution quality.

Tiny amounts per trade add up across millions of orders, which is why the routing decision matters. The question regulators ask is not only 'did the customer get a better price than the quote?' but 'was this the best price reasonably available?'

#What rules apply to PFOF in the United States?

In the US, PFOF is legal but wrapped in disclosure and conduct rules. First, your trade confirmation must say whether the broker receives payment for order flow and that details about its source and nature are available on request⁠^[2]. Second, under Rule 606, brokers publish quarterly public reports on where they route customer orders, including payments received from the venues and a description of their PFOF arrangements⁠^[5]. You can also ask your broker where your own orders were routed over the previous six months⁠^[1].

Third, the duty of best execution still applies. FINRA Rule 5310 requires firms to use "reasonable diligence to ascertain the best market" so that the price to the customer is as favorable as possible under prevailing conditions, and its supplementary material requires firms that route or internalise orders to review execution quality regularly, taking into account PFOF arrangements⁠^[6]. In January 2023 the SEC published proposals for tougher measures, including an Order Competition Rule and a Regulation Best Execution, but on 12 June 2025 it formally withdrew both and said it does not intend to issue final rules on those proposals⁠^[7]. As of that notice, the existing disclosure and best-execution framework is what applies.

#How do the UK and the EU treat PFOF?

The UK went the other way early. In its 2012 guidance the Financial Services Authority concluded that PFOF is "unlikely to be compatible with our inducements rule and risks compromising compliance with best execution rules"⁠^[4]. The EU followed with a law: when the Council of the EU adopted the revised markets rules (known as MiFIR and MiFID II) on 20 February 2024, it said they "impose a general ban on 'payment for order flow'"⁠^[8]. Member states where the practice already existed could exempt firms serving clients in that country only, but the Council said "this practice must be phased out by 30 June 2026"⁠^[8]. The regulation allowed such exemptions only until 30 June 2026⁠^[9], and Germany was the only member state on ESMA's list of countries using one⁠^[10]. Germany's financial supervisor, BaFin, has since confirmed that Germany used the exemption until 30 June 2026 and set out the rules that apply since 1 July 2026⁠^[11].

#How does PFOF compare with fees in other parts of finance?

PFOF is one of several places in finance where a third party pays your provider and the cost is not on your receipt. Card payments work in a similar way: shops pay interchange fees that end up with your card issuer. If you trade small amounts through fractional shares, routing and execution matter too, because brokers may group fractional orders. And whatever the business model, the protections for your account if a broker fails are covered in how investor protection works.