Payment for order flow

From MarketsWiki
Jump to navigation Jump to search


FTSE Russell banner 2016.gif
FTSE Russell banner 2016.gif


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 a 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]

Order-flow payments subsidize the commission-free trading that became the norm with U.S. retail brokers. However, they are banned in Canada and the U.K. out of concern that the payments discourage brokers from obtaining the best trades for their customers (best execution). The big market makers pay hundreds of millions of dollars a year to retail brokers for their order flows.[3]

References[edit]