Payment for Order Flow

Payment for order flow, often shortened to PFOF, allows many retail brokers, particularly in the United States, to offer commission-free trading. Instead of charging customers commissions, brokers earn money from market makers, who profit from the bid-ask spread on the orders they execute.

For example, a commission-free trading app might send customers’ orders to a large market maker, which pays the app a small amount per share and executes the orders, often at a price slightly better than the best quoted price on exchanges.

Supporters argue it has lowered costs for retail investors and that customers often receive small price improvements. Critics argue it creates a conflict of interest, since brokers may route orders to whoever pays them most rather than whoever offers the best execution, and that it encourages excessive trading.

PFOF is legal in the United States, subject to disclosure and best execution rules. It is effectively banned in the United Kingdom, and the European Union agreed to ban it, with a transition period ending in 2026. Regulators continue to debate its effects on market quality.