Intro
Main takeaways
TD Ameritrade and Robinhood generated the most revenue from stock PFOF in 2020-2021: $994 million and $532 million, respectively. Other brokers, like Fidelity and Vanguard, had no revenue whatsoever from stock PFOF.
PFOF revenue from options trading is roughly double PFOF revenue from stock trading.
Brokers that earn a significant amount of order flow route roughly 100% of their orders to market makers. On the other hand, brokers that earn less revenue from PFOF route proportionally more orders to public exchanges.
Citadel paid the most for PFOF in 2020-2021: roughly 39% of the total PFOF volume.
Major market makers secured $6.1 billion in net price improvement for clients and executed more than 1 trillion share trades in 2020 and 2021 combined. When COVID hit the market and around the meme stock frenzy in Q1 2021, market makers provided 40-70% more net price improvement than the average for the full 2020-2021 period. The main reason behind this is lower liquidity and higher spreads.
BrokerChooser is an independent global retail brokerage comparison service that has so far reviewed more than 100 brokerages worldwide and serves more than 200,000 users per month. Our analyst team is constantly on the lookout for emerging trends in the retail brokerage world.
We looked at some of the publicly available data on payment for order flow at retail brokers. Read on to learn what we’ve found.
Table of Contents
- Main takeaways
- What is payment for order flow?
- Payment for order flow revenue, by broker
- Payment for order flow - overview of brokers
- Payment for order flow revenue, by asset type
- Breakdown of non-directed orders, by broker
- Net price improvement at major market makers
- Executed share number at major market makers
- Contact us
To see other analyses in BrokerChooser's data dashboard, visit this page.
Payment for order flow and market makers
What is payment for order flow?
US brokers provide commission-free trading for US customers, but most of them earn revenue from payment for order flow (PFOF). PFOF is a practice when brokers are compensated by market makers, such as Citadel or Virtu, for selling customer order flow.
Customers should be aware that commission-free trading does not equal zero costs. US brokers that rely on payment for order flow provide a smaller price improvement for customers, i.e. the gap between the actual executed price and the so-called national best bid and offer (NBBO). Here at BrokerChooser, we consider this missed price improvement as an implicit cost, because customers would usually be better off if they chose a broker that doesn’t rely on PFOF over a broker that does.
Payment for order flow and other market structure-related topics are on the agenda of the US regulatory body, the Securities and Exchange Commission (SEC) for possible regulation. SEC Chair Gary Gensler said that banning PFOF is also on the table. A ban on PFOF would force most commission-free brokers in the US to change their business model.
Payment for order flow and market makers
Payment for order flow data
- Data was collected from brokers’ SEC 606 reports.
- 'S&P 500' denotes revenue from PFOF for stocks that are components of the S&P 500 stock index. 'Non-S&P 500' denotes revenue from PFOF for all other stocks.
- We used brokers’ PFOF data for the full years of 2020 and 2021.
Notes to the chart:
- Data was collected from brokers’ SEC 606 reports.
- Brokers are categorized as newcomer if they were founded in the last 10 years, and incumbent if they were founded more than 10 years ago.
- We used brokers’ PFOF data for the full years of 2020 and 2021.
Notes to the chart:
- Data was collected from brokers’ SEC 606 reports.
- S&P 500 stocks cover stocks that are components of the S&P 500 stock index. Non-S&P 500 stocks cover all other stocks.
- We used brokers’ PFOF data for the full years of 2020 and 2021.
Payment for order flow and market makers
Execution venues % of non-directed orders
- Data was collected from brokers’ SEC 606 reports.
- Percentages may not add up to 100% in some cases because the data covers only non-directed orders, i.e. when customers don’t specify the execution venue.
- We used brokers’ PFOF data for the full years of 2020 and 2021.
Payment for order flow and market makers
Market maker data
Notes to the chart:
- Data was collected from market makers’ SEC 605 reports.
- We selected Citadel, Virtu, G1X and Two Sigma, as they are the biggest market makers and most retail brokers route their retail orders to them.
- The net price improvement is the aggregate amount of the following: improved shares multiplied by the price improvement amount, minus disimproved shares multiplied by the disimprovement amount.
Notes to the chart:
- Data was collected from market makers’ SEC 605 reports.
- We selected Citadel, Virtu, G1X and Two Sigma, as they are the biggest market makers and most retail brokers route their retail orders to them.
Payment for order flow and market makers
Contact us
If you have any questions about the methodology or dataset, feel free to contact us:
Ádám Nasli, Broker Expert: [email protected]
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