If Donna wants to buy a single share of Apple (trading at $144.58 as I write this), theoretically there needs to be another investor ready to sell their share to her. Of course, most of this happens in mere milliseconds via technology and algorithms.Įvery trade has two sides: buyer and seller. But each transaction triggers key players into action. The user experience of brokerage apps these days simplifies trading to a “buy” or “sell” button. “This is a very exciting corner of the ecosystem-a very important one-that is home to the most sophisticated trading firms in the world,” says Paul Rowady, director of research for Alphacution Research Conservatory, where he studies market structure and the business of trading. It’s a lucrative part of the financial sector that is rarely put under the spotlight, and it’s often misunderstood. The companies operating behind the scenes are creating equity and options markets by mobilizing a combination of advanced high-frequency trading technology and some of Wall Street’s most brilliant minds. PFOF was a hot-button issue in a Senate Congressional hearing over GameStop volatility earlier this year, and financial regulators have said they are taking a closer look at it.Ī key aspect of PFOF is that it’s simply difficult to grasp how it works. While the practice of PFOF has been under microscope and hot debate for more than three decades, meme stock volatility and evolving brokerage business models have brought the discussion into fresh focus-and raised novel concerns over the practice. In the first quarter of 2021, Robinhood reported net revenue of more than $522 million-81% of which was derived from PFOF and other transaction rebates, according to its IPO filing.
Add scale and wild market volatility, and those pennies can add up to hundreds of millions of dollars this extra pocket change helps brokerages finance zero-commission trades. Payment for order flow, also called “PFOF,” is the hyper-complicated, hyper-controversial practice of brokerages like Robinhood or Charles Schwab accepting money (typically fractions of cents) in exchange for client trade orders. Robinhood IPO puts the secretive practice of ‘payment for order flow’ in the spotlight.
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