Most modern retail brokerages (like Robinhood, Webull, and E*Trade) offer $0 commission trading. While this seems “free” to the user, the brokerage must still generate revenue to sustain its infrastructure. The primary mechanism for this is Payment for Order Flow (PFOF).
PFOF is the practice where a brokerage routes its customers’ trade orders to specific “market makers” or “liquidity providers” rather than directly to a stock exchange.
The Mechanical Flow of a Trade
When you hit “Buy” on a PFOF-enabled app, the following behind-the-scenes steps occur:
- Order Entry: You place an order for 10 shares of a stock.
- Routing: Instead of sending your order to the New York Stock Exchange (NYSE), the broker sends it to a wholesale market maker (such as Citadel Securities or Virtu Financial).
- Execution: The market maker fills your order. They might sell you the shares from their own inventory or find a match elsewhere.
- The Rebate: The market maker pays the brokerage a small fee (typically a fraction of a cent per share) for sending them the order.
Why do Market Makers pay for orders?
Market makers profit from the Bid-Ask Spread—the difference between the price someone is willing to pay and the price someone is willing to sell for.
- Profit Logic: By handling a massive volume of “retail” orders, market makers can capture the spread thousands of times a second. Because retail investors (individuals) are generally considered “uninformed” compared to institutional “sharks,” they are safer counterparties for the market maker.
- Data Advantage: Access to the constant stream of retail orders provides the market maker with valuable real-time data on market sentiment.
The Impact on You: Price Improvement
The core debate around PFOF is whether it helps or hurts the individual investor.
- Price Improvement: Regulators require that market makers provide a price that is at least as good as the NBBO (National Best Bid and Offer). In many cases, market makers provide “price improvement,” meaning they give you a slightly better price than you would have found on a public exchange.
- The tradeoff: A $0 commission removes the old per-trade charge. The broker can still be paid by the market maker that receives the order. That payment can pull routing toward the venue that pays the broker, which is a different test from the National Best Bid and Offer.
Who uses PFOF?
- PFOF-Heavy: Robinhood, Webull, E*Trade, Ally Invest.
- Direct-Exposed: Interactive Brokers (Pro) typically charges a commission and uses SmartRouting across venues instead of selling the order. Vanguard also limits PFOF for stock trades.
- Route choice: Public lets customers pick a wholesale route that pays the broker for order flow, or exchange routes that charge an execution fee. A 2021 tip model is not the routing disclosure Public posts in October 2026.
Summary
PFOF is the mechanical engine that made commission-free trading possible for the average person. While it introduces a layer of institutional complexity and potential conflicts, it has also drastically lowered the barrier to entry for the stock market by removing the flat “toll” of transaction fees.
See also: How Order Types Work, Interactive Brokers vs. Webull Comparison, Best Stock Brokers for Beginners
