When put together then, order flow is the transactions the likes of Robinhood send to market makers to execute, and payments for it are what it receives for doing that: Ergo payments for order flow. So going back to our example, if the spread was $0.50, Robinhood gets a kick back, say $0.10 (again this is an arbitrary example – in reality the spread is pennies). Now for Robinhood, because it’s routing these trades to them, market makers will give it a cut of the spread. Typically the spread is much lower but you get the picture. Essentially, if you’re buying a stock, say for $10 dollars – market makers will sell it to you for $10.50 (FYI these are just arbitrary figures for explaining the concept), and if you're selling a stock for $10, they’ll buy it from you for $9.50. So what’s in it for the market makers? The likes of Citadel make money on what’s known as the spread. And because they’ve spent so much money and time on building out their sophisticated technology, these market makers are able to execute trades at better prices than those available at exchanges. Market markets like Citadel have spent billions on technology that lets them do precisely this, at scale and at rapid pace. At the outset, executing a high volume of trades is a lot of work: Robinhood has millions of uses, so being able to execute them when its users want (think in milliseconds, rather than minutes and hours) is a pretty tough task.

There are a plethora of reasons why these retail brokerages do this. PFOF is the practice whereby retail brokerages like Robinhood route trade orders from their clients to market makers – like Citadel Securities or Virtu Financial – to execute trades rather than making those trades with the exchanges – i.e.

Here’s why PFOF is so controversial and for Robinhood, why it’s so important. Robinhood is perhaps the biggest winner of the SEC’s climbdown from a total ban, although the regulator is continuing to look at ways to limit PFOF. The news was particularly surprising in that Gary Gensler, the SEC chair, had been repeatedly critical of PFOF since taking the helm at the regulator. Payments for order flow (PFOF) is a practice that enables retail brokerages like Robinhood to do what they do: Offer commission-free trading.

Last week, Robinhood had an unlikely savior in the form of the US Securities and Exchange Commission (SEC), following reports the regulator wouldn’t ban payments for order flow.

Robinhood pfof