Payment for Order Flow

Payment for order flow, or PFOF, is a business model in which a stockbroker is compensated by a market maker for routing the trades of its clients to that market maker, who profits from the spread between the purchase and sale price and passes a portion of that profit back to the broker. Some of the resulting benefit can be passed on to the retail customer as price improvement, often measured in fractions of a cent per share, and the practice was a key factor in the elimination of most brokerage commissions in the United States and parts of Europe. It remains controversial, criticized by some as a kickback that creates a conflict of interest and reduces market transparency, while others in finance and policy view it more favorably.