The payment that a stockbroker receives from a market maker in exchange for routing its clients’ trades to that market maker is called Payment for Order Flow (PFOF). It’s been derisively termed a “kickback” by its critics. Payments for order flow are an essential component of today’s trading infrastructure, which manages the majority of retail.
PFOF is only legal in the United States if no other exchange offers a lower price on the National Market System. To inform the customer, the broker must disclose that it takes PFOF. Transactions must be completed at the best execution level, which could mean obtaining the lowest possible price or achieving settlement as quickly as possible.
In Canada, PFOF is strictly prohibited and broker costs are charged. It’s also unlawful in the United Kingdom. According to Euronext, authorities in Europe have restricted payment for order flow, with the method being legal in a number of national jurisdictions across Europe.
Why is payment for order flow bad?
The concern is that the payouts may prevent brokers from obtaining the greatest trading prices for their customers, which might constitute a breach of a broker's duty to obtain a client the highest execution on a buy or sell order.
How do you avoid payment for order flow?
The simplest method to avoid charge for order flow is to utilize a broker that does not purchase it. Brokers must disclose if they receive payment for order flow and who they sell it to under SEC rules.