Payment for order flow

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Payment for Order Flow is the practice by some exchanges or market makers of paying a broker's firm for routing its customers' orders to them. It is a way to attract orders from brokers. Generally the amount paid is a penny or more per share. Payment for order flow is one of the ways a brokerage firm can make money from executing customers' trades. The firm can also make money by internalizing orders.

Payment for order flow also allows smaller brokerage, which can't handle thousands of orders at a time, to send orders to another firm to be bundled with other orders for execution. This helps the brokerage firms keep their costs lower.[1]

Upon opening a new account, as well as annually, firms must inform their customers in writing whether they receive payment for order flow and, if so, a detailed description of the type of payments. Firms must also disclose on trade confirmations whether they receive payment for order flow and that customers can make a written request to find out the source and type of the payment for that particular transaction.[2]

References

  1. Payment for Order Flow. Investopedia.
  2. Payment for Order Flow. SEC.gov.