Market maker paid out the most in payment for order flow in 2020 and 2021, including $1.7 billion spent on options, followed by Susquehanna and Virtu Financial. By Annabel Smith Citadel Securities takes the top spot when it comes to payment for order flow (PFOF), forking out $2.6 billion in 2020 and 2021 according to 606 reports gathered by the US’ Securities and Exchanges Commission (SEC). The market maker due to its dominant market share accounted for around a third of the total market spend on PFOF in 2020 and 2021, followed by Susquehanna (G1X global execution brokers), which spent a $1.5 billion and Virtu which spent $654 million in the same period. Equities makes up a small portion of PFOF, accounting for around $877.5 million of Citadel Securities’ spend, with $1.7 billion of its $2.6 billion spent on options flow. Citadel Securities declined to comment. Susquehanna had not responded to a request for comment at the time of publishing. PFOF is a form of compensation that comes in the form of transferring some of the trading profits from market makers to brokerages in return for directing orders from varying parties to be executed with them. It’s proved a contentious subject globally, with regulators in Europe and the US exploring the possibility of limiting the practice as some claim it does not channel flow – much of it coming from the mushrooming retail segment – based on best execution. Presenter of Apple series The Problem, Jon Stewart, has claimed on social media that volumes at competitors Virtu and Citadel Securities exceeded those of the New York Stock Exchange at the start of 2021, boosted by PFOF. However, according to 606 disclosures, brokers that do charge PFOF set a flat rate that is charged consistently across wholesalers and market makers argue this supports merit-based allocation. “By charging every wholesaler the same PFOF rate, retail brokers create a level playing field on which wholesalers compete based on the merits of execution quality,” a Virtu spokesperson told The TRADE. “This makes the retail broker’s decision to route more (or less) order flow to a wholesaler based on that wholesaler’s execution quality, the amount of price and size improvement, technology, customer service and operational resiliency―not about how much each wholesaler pays for order flow.” Virtu has long been a strong advocate of PFOF and has been vocal in its concerns around Europe’s Mifir proposals that sought to prohibit payment for order flow for “high-frequency traders organised as SIs”. Under the changes, venues will instead have to earn retail order flow by publishing competitive pre-trade quotes in yet another move to level the playing field between execution venues. In comments submitted to regulators, the firm argued that in contrast with the US markets, EU PFOF is non-transparent and therefore does not support best execution. Instead, it advocated better disclosures to ensure fairness including the percentage of brokers’’ flow allocated to a market maker, and brokers’ order routing logic and process for determining best execution. “While banning PFOF might sound like a simple path forward, we caution that doing so is not simple and risks encouraging new and less transparent and inefficient alternatives to be created,” Virtu said in its statement. There was also talk at the end of last year from the US Securities and Exchanges Commission (SEC) that it would be exploring potential future changes to PFOF regulation in light of complaints it’s conflicted. Around 40% of institutional equity traders in the US have pegged PFOF and regulatory changes surrounding it as the most crucial developing market structure trends for the year to come, according to research by Coalition Greenwich in February.
Another proof that RobinHood is a bucket shop market-making broker in stock/options, very much the same as any of those bucket shop market-making broker in Forex. When you trade with RobinHood, you are basically trading against the broker. So all of the market makers paid approx. $7.8 billion for orderflow and basically trading against us. Another reason why you do not make any money daytrading or scalping in options and another reason why as soon as your order is filled, the market moves against you. I notice that all the time trading with TDA. It's always best to swing trade options and NEVER ever do a market order in options. The slippage is horrible because you don't have access to the central exchange at all.
No. Apparently, no PFOF is allowed in Futures. I dunno about bonds but PFOF apparently is only allowed in stocks and options.
Thank god for pfof, trading fees for retail traders are virtually zero. You can have your penny spread all day long, thank you Like your at market execution would be any better without pfof? Lol.
%% Excellent points. Commissions have been down\trending for decades, we need PFOF. I'm sure not a market maker, with a nick name like mine. REALLY,who would want to work for nothing?? PFOF is disclosed, for those who know how to read.
Thank God for PFOF that we don't even know how much we have lost in potential profit while saving these minuscule trading costs. I can tell you a story when I was trading options with IB and TDA at one point. IB *supposedly* does not PFOF and TDA does this is why TDA's commission is so low. One day, I was trading an option combo in IB but all of sudden there was a problem with IB's data(it happens often with IB) and I was not getting price feed so I had to use TDA's feed. For exactly the same combo, same contracts, same expiration, same everything, I got filled at double the price that I took from TDA's feed with IB. The price was showing on TDA's feed as 0.40 and I got filled at 0.80. I am NOT joking. I couldn't believe my eyes. I thought I must've traded the wrong option combo with the wrong expiration or whatnot. I had to quadruple-check everything. Nope everything is correct just the price is double the price shown on TDA and IB is non-PFOF *supposedly* and TDA is PFOF. The only time that I actually got something better from IB. And mind you, the price difference persisted between the two brokers. It's not like all of sudden the price that I got filled at suddely dropped to the price level shown on TDA or TDA adjusted the price higher to match that of IB, no it stayed higher throughout the entire duration of the option until eventually it become zero so that execution was not a mistake. The price offered at IB was genuinely higher by 2X!! From that time on, I am convinced how evil PFOF is; how much money we are actually in PFOF. Just look at Futures, it doesn't have PFOF and people are still trading and making money. If the trading cost is so high to the point of not making money, nobody will be trading Futures. Stocks and options have now such a high trading volume there is no way that our trading cost would be higher than the commissions on Futures without PFOF. Think of this way, if the dealers are really giving us a better deal, WHY would they still insist on paying for OrderFlow? We are directly trading against them. So if we are winning and getting the better deal, they must be losing. Why would they be in the business to lose money?? That would not be making sense. So the only conclusion is they must be making more money but where? If we are getting lower trading cost *supposedly*, then if they are making money, then they must be making more than what we are saving in trading costs. It's obvious.
Ignorant take. At market executions are almost by definition no worse without PFOF, and are often better. Look up IBKR price improvement stats for example. PFOF is anti competitive (Citadel even says so themselves) and parasitic on real price setters in the market (NBBO). The natural end game of this system is one monopoly market maker that can make the spread whatever they want and give you 0.0001 "price improvement" on it.