Why Fidelity Refuses Payment for Order Flow

The Business Case Against PFOF

Fidelity isn't being charitable—they've done the math and concluded that rejecting PFOF is actually good business:

1. Different Revenue Model

Fidelity manages over $11 trillion in assets. Their real profit comes from:

• Asset management fees on mutual funds
• Net interest revenue (though they pay better rates than Schwab)
• Advisory services
• 401(k) administration

Trading is a customer acquisition tool, not a profit center. They'd rather have your assets than a few cents per share on your orders.

2. Competitive Differentiation

Being the largest broker without PFOF is a meaningful marketing advantage. When the SEC investigates order execution, Fidelity looks clean. When financial media criticizes PFOF, Fidelity looks smart.

3. Regulatory Risk Avoidance

The EU banned PFOF effective 2026. The SEC considered banning it in the US. While those rules didn't materialize, Fidelity avoids the regulatory headaches that Robinhood constantly faces.

How Fidelity Executes Orders

Instead of selling orders to market makers, Fidelity uses a few different methods:

1. Internalization via Fidelity Capital Markets

Fidelity's own market-making arm (Fidelity Capital Markets) can fill orders internally. They make money from the spread, but they're not paying themselves PFOF—it's a different economic model.

2. Smart Order Routing

Orders that aren't filled internally are routed to exchanges (NYSE, Nasdaq) or alternative trading systems (dark pools) based on where Fidelity expects the best execution.

3. Price Improvement Focus

Fidelity claims their execution saves customers money compared to PFOF brokers. Their 606 reports show price improvement statistics, though these are notoriously hard to compare across brokers.

Does It Actually Matter?

This is the real question. Research suggests:

• For small orders ($1,000): The difference is pennies. Maybe $0.50-$2.00.
• For large orders ($50,000+): Better execution could save $10-$50 per trade.
• For active traders: Annual savings could be hundreds or thousands of dollars.

Interactive Brokers, another non-PFOF broker, claims their execution saves $10 per 1,000 shares versus PFOF brokers. That's a reasonable estimate.

The Catch: Fidelity Isn't Perfect

To be fair, Fidelity does collect PFOF on options orders. Only equity orders (stocks and ETFs) are PFOF-free. Their options PFOF is lower than competitors, but it exists.

They also route orders to market makers for other reasons (liquidity, speed) even if they don't accept payment. The execution quality matters more than the payment arrangement.

Who Else Rejects PFOF?

• Interactive Brokers Pro: No PFOF on their Pro tier (IBKR Lite uses PFOF)
• Public.com: Rejected PFOF in 2021, routes to exchanges
• Vanguard: No PFOF on most order types

Notably, Schwab, E*TRADE, Webull, and Robinhood all accept substantial PFOF.

What This Means for You

If you're choosing between Fidelity and a PFOF broker like Robinhood, consider:

Choose Fidelity if:

• You trade large positions where execution matters
• You value the principle of aligned incentives
• You want excellent research and customer service
• You're building long-term wealth (Fidelity's core competency)

The trade-off:

• No 3% IRA match (Robinhood offers this)
• $0.65 options commissions (Robinhood = free)
• Less aggressive promotional bonuses

The Bottom Line

Fidelity's rejection of PFOF is partly principle, partly business strategy. They can afford to forgo hundreds of millions in PFOF revenue because they make billions from asset management.

For customers, it means better execution quality—probably saving $10-$100 per year for casual investors, potentially more for active traders. It also means your broker's interests are more aligned with yours.

That's worth something. How much depends on how you trade.