What is Payment for Order Flow? Definition, Formula, and Example
Payment for order flow is the rebate a retail broker receives from a wholesale market maker for routing its customer orders to that market maker for execution.
Payment for Order Flow: Plain-English Definition
Payment for order flow (PFOF) is the compensation a retail broker receives from a wholesale market maker in exchange for routing its customers' marketable orders to that market maker for execution. Instead of sending orders to a public exchange, the broker ships them to a wholesaler — firms like Citadel Securities, Virtu Financial, Susquehanna, or Jane Street — which internalizes the order, fills it from its own inventory, and pays the broker a per-share or per-contract rebate. PFOF is the primary revenue source that makes zero-commission retail trading economically viable in the United States.
How It Is Calculated
PFOF rebates are paid on a per-share (equities) or per-contract (options) basis. Typical 2024-2026 rates:
- Equities: $0.0010 – $0.0030 per share routed
- Options: $0.30 – $0.65 per contract routed
Broker PFOF revenue = Σ (shares routed × equity rebate) + Σ (contracts routed × option rebate)
Brokers disclose routing arrangements and rebate rates quarterly under SEC Rule 606. Wholesalers are required to provide execution at or better than the National Best Bid and Offer (NBBO) — the best public quote across all exchanges at the moment the order arrives.
Worked Example
Robinhood disclosed $974 million in transaction-based revenue for 2021, the majority of which was PFOF, with options PFOF producing substantially higher per-order economics than equities. A single retail order to buy 100 shares of AAPL at the NBBO of $180.00 might be internalized by a wholesaler at $179.998, saving the customer $0.20 in price improvement while paying the broker $0.20 (100 shares × $0.002) in rebate. On an options order to buy 10 SPY calls, the broker may collect $4.50 (10 contracts × $0.45) while the wholesaler captures the bid-ask spread minus price improvement. Charles Schwab, E*TRADE, Webull, and Robinhood all accept PFOF; Fidelity accepts PFOF on options but not equities, and Public.com refuses PFOF entirely.
When It Matters to Traders
PFOF explains why retail brokers can offer $0 equity commissions — the economics pay for customer acquisition, platform development, and profit margin. Retail traders routed through wholesalers often do receive measurable price improvement versus NBBO, particularly on small marketable orders. Active traders evaluating brokers compare Rule 606 disclosures, effective spread, and price improvement per share to quantify the real cost of "commission-free" trading.
Limitations and Common Misconceptions
PFOF creates a structural conflict of interest: the broker's incentive is to route to the wholesaler paying the highest rebate, which may not be the venue offering the best execution. The SEC proposed Rule 615 in December 2022 requiring certain retail orders to be exposed to competitive auctions before internalization — the rule was watered down and re-proposed in subsequent years. PFOF is banned in the United Kingdom, Canada, and across the European Union (the EU ban took full effect in 2026). PFOF is not "free money" — retail traders effectively pay through slightly wider effective spreads compared to direct institutional access, though the net cost for small orders is often lower than pre-2019 commission structures. Finally, PFOF applies only to marketable orders; resting limit orders routed to exchanges do not generate meaningful PFOF revenue.