Payment for Order Flow (PFOF): Definition and How It Works

Payment for order flow (PFOF) is a form of compensation, usually in terms of fractions of a penny per share, that a brokerage firm receives for directing orders for trade execution to a particular market maker or exchange. Payment for order flow is common in options markets, and is increasingly found in equity (stock market) transactions. Equity and options trading has become increasingly complex with the proliferation of exchanges and electronic communication networks (ECNs). Although the notorious Bernard Madoff was an early practitioner of payments for order flow, the practice is perfectly legal provided both parties to a PFOF transaction fulfill their duty of best execution for the customer initiating the trade. At a minimum, that means providing a price no worse than the National Best Bid and Offer (NBBO). Brokers are also required to document their due diligence procedures ensuring the price obtained in a PFOF transaction was the best available from a variety of alternative order

Payment for order flow (PFOF) is a form of compensation, usually in terms of fractions of a penny per share, that a brokerage firm receives for directing orders for trade execution to a particular market maker or exchange. Payment for order flow is common in options markets, and is increasingly found in equity (stock market) transactions. Equity and options trading has become increasingly complex with the proliferation of exchanges and electronic communication networks (ECNs). Although the notorious Bernard Madoff was an early practitioner of payments for order flow, the practice is perfectly