What is Stock Brokerage Company “Payment For Order Flow”?

Posted on May 28, 2024 by Dr. David Edward Marcinko MBA MEd CMP™

By Staff Reporters

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Payment for order flow, or PFOF, is a tactic some brokerages use to rake in piles of cash. Payment for order flow (PFOF) is a form of compensation, usually in terms of fractions of a penny per share, that a brokerage firm receives for directing orders for trade execution to a particular market maker or exchange. Payment for order flow is common in options markets, and is increasingly found in equity (stock market) transactions.

CITE: https://www.r2library.com/Resource/Title/082610254

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How does it impact everyday investors?

The “P” in PFOF stands for “payment.” That’s because PFOF gets stock brokers paid. It starts when brokers direct trade orders to a particular e-trading firm (like Mountain Securities, for example) instead of routing the trades straight to exchanges. At that point, the e-trading firm may be able to collect the difference between the bid and the ask price, and the brokerages get a cut of that profit. It’s the proverbial “You scratch your broker’s back through their bespoke Ermenegildo Zegna suit, and they’ll scratch yours.”

According to Lillian Stone, some industry experts argue that PFOF is a conflict of interest. (The practice came under scrutiny last year when US brokers made billions on meme stock trading.) You want your broker to get you the best possible prices during a trade, right? Well, if your broker is incentivized to work with one specific e-trading firm, there’s a chance you may not get the sweetest deal—but they’ll line their pockets all the same.

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ORDER: https://www.routledge.com/Comprehensive-Financial-Planning-Strategies-for-Doctors-and-Advisors-Best/Marcinko-Hetico/p/book/9781482240283

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PFOF: New SEC Rules Not Thrown Out Entirely!

Posted on December 15, 2022 by Dr. David Edward Marcinko MBA MEd CMP™

By Staff Reporters

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DEFINE: https://wordpress.com/post/medicalexecutivepost.com/274910

DEFINITION: https://www.cfainstitute.org/-/media/documents/issue-brief/payment-for-order-flow.ashx

CITE: https://www.r2library.com/Resource/Title/082610254

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Yesterday the SEC proposed the biggest update to the stock trading rules book since 2005. The four proposed rules may become the magnum opus of Gary Gensler, who took over as SEC chair after the meme stock mayhem of 2021. The rules aim to get retail traders better prices by targeting a method of executing trades called payment for order flow (PFOF). PFOF works like this:

  • Brokers like Robinhood send trades to wholesalers like Citadel, which profit off the difference between the individual trader’s proposed price and the price they actually make the trade for.
  • Wholesalers pay brokers a small fee for the privilege of making the trade, and *juicy detail alert* those “small fees” make up a huge chunk of the brokers’ revenue.

Gensler has long argued that PFOF limits competition and encourages brokers to gamify risky trading behavior—like vetting your life savings on GameStop stock. The practice is banned in the UK and Canada.

But the SEC has definitely put it in the “no longer sparks joy” pile

Under the most significant rule proposed yesterday, the “order competition” rule, wholesalers would have to send most retail investors’ trades to an auction where dealers compete to fulfill them for the best price.

The wholesaler only gets to fulfill any leftover trades that no one has bid on. Some on Wall Street argue this will be the most common scenario so the rule won’t have its intended effect, but Gensler thinks auctions could save individual traders up to $1.5 billion per year.

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ORDER: https://www.routledge.com/Comprehensive-Financial-Planning-Strategies-for-Doctors-and-Advisors-Best/Marcinko-Hetico/p/book/9781482240283

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