What is a payment for order flow (PFOF)?
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If you are a company which offers to buy and sell any stock then you are a market maker. Market makers who offer to trade with anyone will often end up trading with very large very clever people called hedge funds.
For a market maker to be profitable when trading against these ultra smart guys they have to set a big difference between the price they buy and sell at.
If you could only take orders from regular non-smart people then you could set the difference between buy and sell prices much lower and make even more profit than before. You can take a portion of this extra profit and feed it back to the person sending you these orders as a thank you for bringing in this profitable business. That’s PFOF.
PFOF money allows brokers to offer their service for free. Your orders are the product, the market makers are the customers.
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