Payment for Order Flow: The $943M Business Behind "Free" Trading
When you place a "free" trade on Robinhood, your order is sold to Citadel Securities. They paid brokers $3.8 billion last year for this privilege. Here's exactly why—and what it might cost you.
How Your Order Actually Flows
Citadel handles 41% of all retail stock orders in the US
What Is Payment for Order Flow?
Payment for Order Flow (PFOF) is exactly what it sounds like: market makers pay brokers for the right to execute customer orders.
When you click "buy" on Robinhood, your order doesn't go to the New York Stock Exchange. It goes to a market maker—usually Citadel Securities or Virtu Financial. They pay Robinhood roughly $0.002-$0.004 per share for this privilege.
Why would they pay for orders? Because knowing what retail investors are buying and selling is valuable. They can profit from the bid-ask spread, from trading against order flow, and from the information itself.
The Money: Who Makes What
Broker PFOF Revenue (2024)
Market Maker Volume Share
The Controversy: Does PFOF Hurt You?
This is hotly debated. Here are both sides:
The "PFOF Is Fine" Argument
- Market makers often provide "price improvement"—filling orders at slightly better prices than the quoted spread
- Commission-free trading saved investors billions in explicit costs
- SEC regulations require "best execution"
- For small orders, the impact is fractions of a penny per share
The "PFOF Is Bad" Argument
- Market makers wouldn't pay billions unless they were making more
- Orders routed to exchanges might get better prices
- The EU banned PFOF as of 2026; the UK banned it in 2012
- Creates conflicts of interest between brokers and customers
- Concentrates market power in a few giant players (Citadel = 41%)
What the Research Says
Academic studies suggest PFOF costs investors approximately:
- $0.01-$0.02 per share on average versus exchange execution
- More for larger orders, less for smaller orders
- More in volatile markets, less in calm markets
Interactive Brokers claims their non-PFOF execution saves customers about $10 per 1,000 shares traded.
For a casual investor buying 50 shares of Apple, we're talking about $0.50-$1.00 in hidden costs per trade. For an active trader doing 100 trades a month, it's $50-$100 monthly.
Which Brokers Don't Use PFOF?
Brokers Without Payment for Order Flow
These brokers route orders to exchanges or internalize without selling to market makers.
The Robinhood Reality
Let's be specific about Robinhood since they're the poster child for PFOF:
- PFOF represents roughly 70% of Robinhood's transaction-based revenue
- They receive ~$0.002-$0.004 per share on equity orders
- Options PFOF is even more lucrative (~$0.40-$0.60 per contract)
- They paid $45 million to settle SEC charges in 2024, partly related to execution quality
Robinhood's business model is essentially: make trading addictively simple, generate massive order flow, sell that flow to market makers. It works—they have 24 million accounts. But you should understand you're the product, not just the customer.
Should You Care?
Probably not if:
- You make occasional trades of $1,000-$5,000
- You're a long-term buy-and-hold investor
- You value simplicity over pennies
Yes, if:
- You trade actively (10+ trades per month)
- You trade large positions ($10,000+)
- You care about market structure and conflicts of interest
- You believe the EU and UK had good reasons to ban PFOF
The Bottom Line
PFOF isn't a scam—it's a business model trade-off. You get free trading; brokers sell your orders; market makers profit from the flow.
The real question is transparency. Robinhood built a $40 billion company largely on this revenue stream without most customers understanding it. That asymmetry of information matters.
Now you understand. Choose accordingly.