Payment for Order FlowPFOF
Payment for order flow is when a broker is paid by a market maker for sending it customers’ orders. It helps fund commission-free trading but raises conflict-of-interest questions; US brokers must disclose it in routing reports, and some jurisdictions restrict or prohibit it.
Payment for order flow is when a broker is paid by a market maker or wholesaler for sending it clients' orders. It helps fund commission-free trading but creates a conflict of interest. US brokers must disclose it, and some jurisdictions restrict or ban it.
- Category
- Market Structure
- Reading time
- 3 min
- Also called
- Order flow payments
- Updated
PFOF in plain words
Payment for order flow (PFOF) is money a broker earns for sending retail customers' orders to a wholesaler — a market maker — that takes the other side.1
European regulators see a clear conflict of interest: the broker is tempted to route to whoever pays most, rather than wherever clients get the best result.2
Rules vary: in the EU, regulators consider PFOF largely incompatible with MiFID II.2
How PFOF works
You place an order
A retail order goes to a commission-free broker.
Broker routes
The broker routes the order to a wholesaler and receives a payment for it.1
Wholesaler fills
The wholesaler takes the other side, often from inventory.
Best execution applies
In the US, these payments must never get in the way of the broker's duty of best execution.3
Conflict
Be aware of the conflict: the broker may favour whoever pays most over the best result for you.2
Disclosure
Check your broker's routing reports.
Worked examples
Example 1 — Broker revenue
4,000 a dayHypothetical: 0.002 per share on 2,000,000 shares a day.
| Daily PFOF | 4,000 |
The broker earned a payment for sending the order to the wholesaler.1
Example 2 — Hidden cost
Net −2.00A hypothetical client saves a 1.00 commission but fills 0.01 worse on 300 shares.
| Commission saved | 1.00 |
| Price cost | 3.00 |
This is exactly the conflict regulators worry about: routing for the payment, not for the client.2
Example 3 — EU client
RestrictedA hypothetical EU broker considers PFOF.
| Regulatory view | Unlikely compatible |
In the EU, regulators consider receiving PFOF unlikely to fit with MiFID II in most cases.2
PFOF broker vs commission broker
| Aspect | PFOF model | Commission model |
|---|---|---|
| Client fee | Often zero | Per trade |
| Broker income | Wholesaler payments | Commissions |
| Conflict | Higher | Lower |
| Routing | Often to wholesalers | Often to exchanges |
Where PFOF matters
Choosing a broker
How your Broker earns money.
Costs
Hidden Trading Fees and Commissions in spreads.
Market makers
Role of the Market Maker.
Fills
Judging Market Order quality.
Advantages and disadvantages
Advantages
- Funds zero-commission trading.
- Retail orders often get small price improvement.
- Fast fills.
Disadvantages
- Conflict of interest.
- Costs are less visible.
- Restricted or banned in some jurisdictions.
- Hard for clients to compare.
Going deeper
Read as far as you need. Each level builds on the one before it.
Definition
Beginner
PFOF means a broker is paid by a third party for sending client orders to it for execution.2
US approach
Intermediate
In the US it is allowed with disclosure, but it must not undermine best execution.3
EU approach
Advanced
European regulators take a much stricter line and see it as largely incompatible with MiFID II.2 Rules differ by jurisdiction.
Common mistakes
Thinking zero commission is free
Spread is a cost.
Ignoring routing reports
Read them.
Assuming PFOF is legal everywhere
Rules differ.
Using market orders carelessly
Prefer limit prices.
Check your understanding
Test yourself before moving on. Each answer comes with an explanation.
Key points to remember
- PFOF pays brokers for routing orders.
- It funds commission-free trading.
- It creates a conflict of interest.
- Best execution still applies.
- Rules differ by jurisdiction.
Frequently asked questions
Is PFOF legal?
Does PFOF hurt me?
How do I check?
Further learning
- Broker
Broker business models.
- Market Maker
Who pays PFOF.
- Bid-Ask Spread
Where costs hide.
- Trading Fees and Commissions
Visible costs.
Sources
This article is written in our own words. The sources below support the specific facts, rules and figures marked with a number in the text. Links open the original publisher’s page.
- Congressional Research Service. Payment for Order Flow (PFOF) and Broker-Dealer Regulation (opens in a new tab) Checked .
- ESMA. ESMA warns firms and investors about risks arising from payment for order flow (opens in a new tab) Checked .
- FINRA. Regulatory Notice 15-46: Guidance on Best Execution Obligations (opens in a new tab) Checked .
Educational content, not financial advice. Examples use hypothetical prices and simplified costs; actual fees, margin rules and regulations vary by broker, market and country. We are not affiliated with any publisher linked above. Last reviewed . Report an error or request a source credit.