Payment for Order Flow



I read a WSJ article about this controversy, and was looking for more insight. The article mentioned that this practice saves individual investors as a whole over $3 billion last year. What is the downside of payment for order flow? Would the individual investor be better off just paying fees and having the trades be sent to an exchange instead of a high-speed trading firm? Is there a consensus on which side is right in this argument, or are there a lot of pros and cons for each side of the debate?

In: Technology

The current NYSE and NASDAQ systems use two day clearance. That means if you buy on Monday, you can sell on Wednesday. This dates from days when there were paper certificates for stocks.

By selling order flow, a broker can get “instant clearance”, since we don’t actually use paper any more. It costs a little, and impacts prices a little, but for most users it’s a good deal. The only time it hurts is when something gets crazy volatile. Frankly, most investors shouldn’t be day trading in volatile issues.