Why Payment for Order Flow Made Trades Free But Left SEC Skeptical

At the heart of the way stocks have come to be bought and sold in the US in recent years is something called payment for order flow, or PFOF. It’s what’s made much of stock trading commission-free, which in turn brought into the markets the millions of new retail investors who fueled 2021’s so-called meme stock revolution. But PFOF has also become a focus of attention for the US Securities and Exchange Commission. The SEC decided not to ban the practice, but has set in motion the biggest revamping of equity market structure in more than a decade, changes that could make PFOF less profitable or potentially even disappear.

It’s money paid to brokerages to execute orders coming from the brokerage’s retail investors. The firms making the payments are electronic wholesalers, also known as market makers, and include such giants as Citadel Securities, Virtu Financial and Susquehanna International Group. Between them, Citadel and Virtu handle more than half of the wholesale trading market; Citadel alone handles one in every four US equities trades. The payment recipients are retail brokers that range from newcomers like Robinhood Markets Inc. to veterans like E*Trade and Charles Schwab Corp. The payments are allowed if the market makers and brokerages are providing brokerage clients with what regulators consider “best execution” on trades, a standard based on a combination of price, speed and other factors.