Payment for order flow (PFOF)
A practice in which a broker routes customer orders to a market maker that pays the broker for those orders.
When a retail broker sends customer orders to a market maker, the market maker may pay the broker a small amount per share or per order. The market maker earns money from the bid-ask spread and from matching orders internally. Brokers must disclose the practice and are obligated to seek best execution for their customers.
Traders care because PFOF affects execution quality, including price improvement and fill rates, and it is a revenue line for many brokers. Rule changes that restrict or ban PFOF change broker economics and can change where retail orders are routed. Review a broker's routing disclosures before assuming a fill is the best available price.
Worked example (illustrative numbers, not real data): a broker receives 0.001 dollars per share on 1 million shares routed in a month. That is 1,000 dollars of PFOF revenue for the month.