Payment for Order Flow (PFOF) — The Real Cost of 'Free' Commissions
How do brokers advertising 'zero commissions' make money? A substantial part of the answer lies in 'Payment for Order Flow,' PFOF.
Definition of PFOF
PFOF (Payment for Order Flow) is the practice where a wholesale market maker pays a retail broker 'in return for handing customer orders over to them.'
Instead of sending customer trade orders directly to the market, the broker hands them to large market makers such as Citadel Securities and Virtu. The market maker receives those orders and executes them, and in return gives the broker a rebate on the order of a fraction of a cent per share.
Because of this revenue, the 'zero-commission' model became possible.
How the money flows
Laying out the flow, it goes like this.
① The investor presses the trade button in the broker's app. ② The broker hands that order to a wholesale market maker. ③ The market maker executes the order and pays the broker a rebate.
The market maker earns a profit on the spread against a multitude of retail orders, and the broker makes revenue from the rebate. According to Congressional Research Service (CRS) material, Robinhood at one point earned about $974 million from PFOF, which accounted for roughly half of its revenue.
Is free really free — the conflict-of-interest debate
The core debate around PFOF is conflict of interest.
A broker has a duty to give the customer the most favorable execution (best execution), yet if it routes orders toward the market maker paying the biggest rebate, that can conflict with that duty. That is, 'commission is zero, but the execution price gets slightly worse, so you may pay an invisible cost.'
In the United States it is governed by the SEC's best-execution duty (FINRA Rule 5310), and discussions to restrict or reform PFOF itself have continued. On the other hand, there is also a defense that PFOF drove the zeroing-out of commissions and lowered the barrier to individual investing.
What matters is understanding the structure hidden behind the word 'free.'
The Robinhood PFOF revenue figure (about $974 million, half of revenue) is based on Congressional Research Service (CRS) material. Whether PFOF is permitted and how it is regulated differs by country and broker. This article does not recommend or criticize any particular broker; its purpose is to help you understand the cost structure.
よくある質問
Q. If commissions are zero, isn't it automatically a benefit to the investor?
Not necessarily. Even with no explicit commission, if orders are routed mainly toward rebates, the execution price can get slightly worse, creating an invisible cost. Understanding the structure of 'free' is what matters.
Q. Does PFOF exist in Korea too?
PFOF is a practice discussed mainly in the U.S. market, and whether it is permitted and how it is regulated differs by country. Some countries ban it or restrict it strongly. It is best to check the rules of the market and broker you use.
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