Some argue that without payment for order flow, brokers would still send trades to market makers, but without a split of the spread, they'd have to charge retail investors. They may also trade against the investor’s order by selling shares short and driving the price down. For example, they make money by selling a stock for a slightly higher price than they bought it for. Entities such as market makers or wholesale brokers pay retail brokers to direct orders and generate profit from order flow using other means such as bid-ask spreads. With PFOF, online brokerages such as Charles Schwab, TD Ameritrade, Robinhood receive a fraction-of-a penny payment in exchange for sending orders to wholesale brokers such as Citadel Securities, Virtu Financial or Two Sigma for execution at the best publicly available price displayed across all U.S. Retail brokers send client orders to market makers, who, in turn, commit to provide the retail brokers’ liquidity at the current national best offer (when the investor is buying) or national best bid (when the retail investor is selling) -or better! Hidden trading fee PFOF accompanies most commission-free brokers, enabling them to reduce investment costs for clients.
In simple terms, it is the compensation a broker receives for routing trades to specific entities for trade execution. Payment for order flow transfers trading profits from market makers to the brokers that route customer orders to specialists for execution.
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