If the wholesaler is able to purchase the stock at a lower price than the client asked for, the bid-ask spread serves as a bounty split by the brokerage and the wholesaler.Ī wholesaler pockets some of that spread for its work in finding the better price, and the remainder is paid out to the brokerage for passing along the order to the wholesaler in the first place (hence, “payments for order flow”). The price that the wholesaler is able to locate and execute on is called the bid spread. In a trade, a client gives the brokerage firm an ask price, or how much they’re willing to pay for a security. The profit-sharing of this scheme is built into the bid-ask spread. These market makers then execute the purchase or sale of a stock at publicly quoted prices, in turn paying brokerage firms for routing the trade through them. In a payments for order flow model, a brokerage processes orders from investors and passes them on to a wholesaler, like Citadel Securities or Virtu Americas. “Payment for order flow helps cover the costs of running our business and offering commission-free trading to customers,” Robinhood CEO Vlad Tenev told the House Financial Services Committee during a hearing about the GameStop incident on Thursday.

Other brokerages followed, and a race for scale triggered a number of blockbuster mergers beginning in 2019. But Robinhood disrupted the industry by abandoning the model entirely and eliminating fees, opting to rely instead on payments for order flow to make money.

The surge in payments for order flow coincided with the brokerage industry’s departure from a commission-based model, which used to charge clients a fee for making trades.

Payment to order flow