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Payment for order flow

| Contributor:
Hoang Truong


Payment for order flow is a process whereby online brokerages rely upon high-frequency trading (HFT) firms, or market makers, to execute stock and option investment transactions. This means your orders aren't being directly executed by your broker, but by a third party.

Since market prices rapidly fluctuate for stocks, you could end up paying a price that's slightly higher or lower than what you'd initially bargained for, and this difference in the price of buying and selling is called spread


1)If you placed a buy order for 100 Google stocks with a brokerage that receives PFOF.

2)After you place the order, your brokerage will send it to a market maker who carries out the actual trade.

3) The market maker will try to find the seller who want to carry out the transaction. The marker maker carry out the risk of holding on the stocks so it will charge a “spread” in the transaction.

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