Payment for order flow (PFOF) is when a broker receives money from a third party (usually a market maker) for sending them your trade orders. It allows brokers to offer free or low-cost trading to retail investors. While it helps reduce trading costs, it also raises questions about whether you are getting the best price for your trade. Understanding PFOF helps you know how your broker earns and whether your trades are being handled fairly.

What Is Payment for Order Flow (PFOF)?

Payment for order flow is when a broker sends your buy or sell order to a market maker or other third party and gets paid for it. Instead of sending your order directly to the stock exchange, the broker chooses a partner who pays them for routing orders. This system helps brokers earn money even when they don’t charge you a fee to trade.

Why Is PFOF Important for Retail Traders?

PFOF is important because it makes trading affordable for small investors. Thanks to this model, brokers can offer zero brokerage accounts and commission-free trades. This has opened up stock market investing to millions of new investors who couldn’t afford high trading fees earlier.

However, the flip side is that your trade may not always be executed at the best available price. The third party who receives your order might fill it at a slightly different rate to make profit. So, while PFOF gives you cheaper access, it may slightly affect your trade value in some cases.

How Does It Work in the Background?

When you place a trade, instead of going directly to the stock exchange, your broker sends it to a market maker who has agreed to pay them for the order. The market maker then completes your trade and tries to profit from the price difference (called the spread) between buying and selling.

In return, the broker gets paid a small fee per trade. You usually don't notice this happening, but it’s an important part of how commission-free platforms work behind the scenes.

Is There Any Risk in PFOF?

Yes, one main risk is that your trade might not get the best price. Since brokers are paid to send your order to a specific place, they might not always look for the best deal for you. This is called a “conflict of interest.”

It doesn’t mean you are always losing money, but it means you should be aware of how your broker earns. Many countries are now checking how fair and transparent PFOF practices are to protect investors like you.

Should You Worry About It?

If you are a retail trader who does small-volume trades, PFOF may not have a big impact on you. You get low-cost trades, and any price difference is usually very small. But if you are trading big amounts or doing frequent trades, even a small difference can affect your returns.

So, it’s good to know how your broker works and what policies they follow. Look for brokers who offer price improvement and transparency about how your trades are executed.