Payment for order flow
What is payment for order flow?
Abbreviated to PFOF, it's the payment a broker gets for sending orders to be executed. The payment doesn't come from the broker's client, but the third party that the order goes to.
Where have you heard about payment for order flow?
In 2016, the Financial Conduct Authority (FCA) warned that PFOF was bad for markets and trades because it creates a conflict of interest between brokerage firms and their clients and can distort the price formation process.
What you need to know about payment for order flow.
The big bonus for brokers is they get paid twice: once by their client and again by the third party. It's controversial because brokers still need to act in the best interest of the client, despite choosing third parties that pay them. Sometimes the client doesn't know the broker receives payment. But as long as the price the broker achieves for the client is better or equal to the price they could get from a third party not paying for order flow, the broker can be said to be acting properly.