Payment for Order Flow: Statistics and Insights
Payment for order flow (PFOF) is the compensation paid by venues like Citadel to brokerage companies like TD Ameritrade in exchange for routing client orders to the venue instead of sending them directly to the stock exchange.
This article reveals the payment for order flow details for the top 7 brokerage firms, explains the concept and provides insights into the PFOF methodology.
The first 606 disclosures with venue details were officially published for the first quarter of 2020. Our current database includes over 86,000 data points and covers all data from January 2020 to June 2021. The next update with Q3-data will be released on October 31.
|Payment for Order Flow||Detail|
|👮 Required by||U.S. Securities and Exchange Commission|
|🏢 SEC Rule||606|
|📆 Release Dates||Apr. 30, Jul. 31, Oct. 31, Jan. 31|
|💰 Paid by||Venues|
|💰 Received by||Brokers|
In 2020, $2.60 billion were paid to the seven leading retail brokerages TD Ameritrade, Robinhood, E*Trade, Charles Schwab, Webull, TradeStation and Ally Invest. TD Ameritrade and Robinhood made the most money by selling order flow to venues like Citadel Securities, Global Execution Brokers, and Virtu Americas. The average quarterly payment for order flow in 2020 was $0.65 billion.
The newly released data reveals that the payment for order flow grew to $1.82 billion in the first half year of 2021.
|Brokerage||2020 Total||2021 First Half Year|
|TD Ameritrade||$ 1,148,550,502||$ 758,487,319|
|Robinhood||$ 687,094,992||$ 547,819,737|
|E*Trade||$ 402,493,959||$ 243,022,332|
|Charles Schwab||$ 245,463,984||$ 139,324,803|
|Webull||$ 63,853,903||$ 92,390,628|
|TradeStation||$ 41,844,854||$ 30,614,875|
|Ally Invest||$ 15,270,053||$ 7,809,078|
|Grand Total||$ 2,604,572,249||$ 1,819,468,772|
TD Ameritrade Payment for Order Flow
The TD Ameritrade payment for order flow income was as high as $1.15 billion in 2020, with a monthly average of $95 million. The monthly average in the first half year of 2021 grew to $126 million for a grand total of $0.76 billion PFOF in the first six months of 2021.
Robinhood Payment for Order Flow
The Robinhood payment for order flow saw significant growth in 2020 to $0.69 billion with a monthly average of $57 million. The trading app is more popular than ever before. New mobile trading apps like Webull may take some market share, but Robinhood leads the segment of mobile trading apps. The monthly average in the first half year of 2021 grew to $91 million for a grand total of $0.55 billion PFOF in the first six months of 2021.
E*Trade Payment for Order Flow
The E*Trade payment for order flow is the third-largest in the list, with a total of $0.40 billion in 2020 with a monthly average of $34 million. The monthly average in the first half year of 2021 grew to $41 million for a grand total of $0.24 billion PFOF in the first six months of 2021.
Charles Schwab Payment for Order Flow
The Charles Schwab payment for order flow is the 4th-largest in the list, with a total of $0.25 billion in 2020 with a monthly average of $20 million. The monthly average in the first quarter of 2021 grew to $23 million for a grand total of $0.14 billion PFOF in Q1 2021.
Charles Schwab acquired TD Ameritrade and concluded the acquisition for $22 billion. The deal was announced in November 2019 and completed in October 2020. Therefore, TD Ameritrade and Charles Schwab payments for order flow go to the balance sheets of Charles Schwab (SCHW).
Webull Payment for Order Flow
The Webull payment for order flow is low compared to the competitors, but it shows the strongest percentage gains over the past 18 months. The PFOF in June 2021 was 33 times higher compared to January 2020. June 2021 was also the strongest PFOF month in the history of Webull, with a total of $20 million received. With this steady growth, it is most likely that they will outrank other brokers in the mid-term.
Looking at the payment for order flow per venue statistics paints a clear picture of the market leaders. Citadel, Global Execution Brokers and Virtu Americas dominate from the venue side with about 71% of the overall business.
|PFOF per Venue||2020 Total||2021 First Half Year|
|Citadel||$ 1,084,128,336||$ 760,859,065|
|Global Execution Brokers||$ 445,993,659||$ 333,838,525|
|Virtu Americas||$ 311,554,521||$ 190,102,485|
|Wolverine||$ 181,274,709||$ 183,823,133|
|other||$ 162,210,301||$ 81,383,616|
|Two Sigma Securities||$ 63,308,651||$ 78,581,114|
|G1 Execution Services||$ 194,878,861||$ 75,240,033|
|Dash Financial Technologies||$ 105,430,694||$ 69,027,034|
|UBS Securities||$ 55,792,516||$ 46,613,767|
|Grand Total||$ 2,604,572,249||$ 1,819,468,772|
Payment for Order Flow by Asset Category
The categories NON-S&P500 stocks and options orders dominate the payment for order flow revenues. It is not a surprise since the spread, which is the baseline for the income, for S&P500 stocks is small since the liquidity is immense. Therefore it is hard to generate price improvements for clients or meaningful income to be shared between venues and brokers. The payment for order flow is dominated by the options trading category.
You can also see that various venues are specialized in one or the other asset category. Venues like Citadel pay for order flow in all three categories, from S&P 500 stocks to NON-S&P 500 stocks and options. Global Execution Brokers and Dash Financial Technologies are specialized in options, while Virtu Americas focuses on stocks.
Payment for Order Flow by Month
In 2020, we saw significant growth in order flow payments, mainly affected by the global challenges. With more people working from home, and higher demand to make money trading the stock market because of zero interests, the online trading industry sees news highs quarter by quarter. Another reason for the growth is the zero commission. That’s an interesting situation. Zero commissions boost payment for order flow revenues since retail investors trade more because it is free to trade.
In January 2020, the payment for order flow was $116.3 million. In June 2020, we saw a temporary high at $293.6 million. 2020 ended with a record breaking payment for order flow of $295.4 million in December.
In 2021 we saw the highest payment for order flow month in February, with $367 million paid by venues to the 7 leading online brokerages. The strong uptrend was mainly caused by the meme stock fancy initiated by the WallStreetBets Reddit forum. The demand in trading stocks like GME, AMC and BBBY decreased, but the overall trading activity is still on a high level.
Some brokerages used different company descriptions within the brokerage 606 disclosures, and some also have different company divisions where the payments for order flow are allocated. Here is our brokerage mapping:
The list of venues is long, and in some cases, they are also differently mentioned within the brokerage 606 disclosures. Therefore, we mapped the venues and focused on the key players. Here is our venue mapping:
January 2021 was a month that we would remember for a long time. Robinhood, Wallstreetbets, Hedge Funds, Citron Research, GameStop, AMC Entertainment, Nokia, BlackBerry dominated the street news.
The Reddit forum r/wallstreetbets grew from 1.8 million members on January 1, 2021, to 7.6 million on January 31, and 10.0 million in April 2021. From April to July 2021, the forum member count grew to 10.7mn. The Robinhood app downloads skyrocketed to new highs, some of the mentioned company stocks explode with temporary gains of over +1,000% and fell 90% after that.
One could only guess how this media presence would affect the payment for order flow revenue.
A controversial discussion already began if payment for order flow is beneficial, transparent, and fair. We may see some regulatory changes in the future.
If brokers are not allowed to receive payments for order flow anymore, a major source of income for them will disappear. Then, the chances are that commissions per trade have to be re-introduced.
Official statistics clearly show that most client orders see price improvements if the orders are routed to the venues. Therefore there is no clear right or wrong.
Payment for Order Flow Concept
You may ask yourself why a venue does pay money to the brokerage firm if the venue does all the work. The answer lies between the bid and ask; the so-called bid ask spread.
Let’s say you are interested in buying stock of company XYZ. The order book shows a national best bid of $105.50, and the best ask is $106.00. If you send a market order to buy 100 shares for the best possible price, your order would probably be executed at $106.00 (I want to keep this example simple, and things like hidden orders, market depth etc., are left aside.)
If in the next moment the best bid and ask are still at $105.50 and $106.00, and you hit the sell market button to close your position immediately, then your order would probably be executed at $105.50.
In that case, you lost 50 cents per share, which equals a total loss of $50.
If you allow your broker to take care of the order routing, they route the retail order to third party firms like Citadel Securities or Two Sigma Securities, called venues.
They receive thousands of buy and sell orders for hundreds of stock symbols every minute. An algorithm matches the client orders if possible. Since not all orders with exact the same order size arrive at the venue’s system at the exact same time, proprietary algorithms average down the order flow and evaluate the potential of price improvements. The venue always has the option to route the order further to the stock exchange.
Back to our example, your buy market order for 100 shares of company XYZ arrives 10 milliseconds before another trader wants to sell 100 shares of company XYZ by using a market order. Typically you would get filled at the next best ask at $106, and he at the next best bid at $105.5. But the venue now maps both orders using their algorithms and shares the profit made.
A significant portion of the benefit of $0.50 per share goes to the retail traders by providing them with a price improvement. Let’s say the buyer gets a fill at $105.8 instead of $106.00, and the seller receives a fill at $105.7 instead of $105.5. Both traders are happy, they did not pay commissions, and both got a price improvement of 20 cents.
The remaining 10 cents (the difference between $105.7 and $105.8) is the profit for the venue. But the venue shares this profit with the brokerage business, so they pay for order flow. This profit split is the Payment for Order Flow, where the venue pays the retail brokerage firms for sending liquidity to them, based on the order flow arrangements and conditions.
Now you may legitimately ask yourself how a venue or broker could make money if the most significant portion of the benefit goes to the investor via price-improvements. Until the end of 2019, you could only guess how much money was made via payments for order flow.
In the past 6 months, 32,600 people ask search engines every month “How Does Robinhood Make Money.” Thanks to the SEC’s revised requirements in SEC Rule 606, U.S. brokerages must list the exact paments received within the 606 disclosure every quarter since 2020. Now we can answer the question of how much money do retail brokerages make by selling order flow.
Selling order flow has become one of the primary sources of income for U.S. Brokers. TD Ameritrade and Robinhood dominate the market, while Webull shows the most significant percentage growth.
Charles Schwab bought TD Ameritrade for $26 billion, and Morgan Stanley acquired E*Trade for $13 billion. We may also see further consolidation activities in the brokerage sector. Depending on how the mergers are executed and which entities remain, the market share per brokerage may change 2021 and beyond.
Payment for order flow became the primary source of income for Robinhood. In 2020, Robinhood had a total net revenue of $958.8 mn and thereof, $687.09 was received via payments for order flow. That means that 71% of total revenues came from PFOF. Robinhood is listed on Nasdaq with the ticker symbol HOOD since July 29, 2021. The Robinhood stock price will primarily depend on the further development of PFOF income, while other brokers like TD Ameritrade and Charles Schwab have other primary sources of revenue.
The quarterly 606 disclosures are the first step in the right direction. The current media presence shows that even more transparency would be beneficial to the industry.
Investors involved in day trading should keep in mind that zero commissions brokers limit the order routing flexibility. At the same time, direct access brokers allow day traders to choose the order routing ECN and exchange directly.
What Is Payment for Order Flow
Payment for order flow means that venues like Citadel Securities pay money to brokerage businesses like TD Ameritrade for routing retail buy and sell orders to the venue system instead of sending it directly to the stock exchange.
Payment for order flow is typically beneficial for all parties involved.
- Back in the days, brokerages had to pay fees to stock exchanges like NYSE and Nasdaq if a trade took liquidity, and they charged commissions of typically $5 per order from clients for each trade. Today, brokers do not pay fees to the stock exchange for taking liquidity if retail orders are routed to the venue. Nearly all leading retail brokers offer zero-commission trading for stocks and options.
- Besides the benefit of paying zero commissions, now traders and investors often receive a better execution price if they are using market orders since the customer orders get mapped in the venue’s system, which often leads to price improvements compared to the NBBO (national best bid and offer). In Q4 2020, TD Ameritrade stated that 96.9% of all orders improved.
- Venues also benefit from the order flow since they keep some of the profits made from matching orders within their internal systems. The spread between the bid and ask is the source of income.
How Do I Know if My Broker Receives Payment for Order Flow
You can check the public 606 disclosure of your broker to see if they receive payments for order flow. Unfortunately, it is not that easy to find the statements on a brokerage website. Use your favorite search engine to look for your brokerage name and add 606 disclosure to find it faster.
Alternatively, you can see it like this: If you are in control of the order routing, then your broker probably does not receive any PFOF. But if you are using order routing methods like “smart” or “intelligent,” then your broker probably routes the order to one of the venues and receives PFOF.
The U.S. Securities and Exchange Commission Rule 606 requires U.S. registered brokers to publish a “Public Order Routing Report Under Rule 606”. You can find further details in this SEC document at sec.gov.
Does It Make Sense to Use a Direct Access Broker Instead of a Retail Broker
A direct-access broker specializes in providing day traders with high-speed order execution and the full range of order routing options. Traders can send orders directly to the NYSE, Nasdaq or Electronic Communication Networks like ARCA.
Low-latency servers with near-stock exchange locations ensure fast order executions. Direct access brokers require traders to fund their account with a minimum of $30,000 and charge commissions of about $0.005 per share. Higher trading volume may reduce the commissions. Keep in mind that exchanges may charge or pay for placing orders on their exchange network.
Is the Concept of Payment for Order Flow New
The concept of payment for order flow is not new. Since the rise of exchange networks, all stock exchanges and ECN’s try to make their network attractive to traders across the world.
The logic goes like this; if a trader removes liquidity with a market order, he needs to pay a fee. But if he provides liquidity by using a limit order, he may receive a payment if the order gets filled. The fees and payments (so-called liquidity rebates) differ from exchange to exchange.
Some order routing constellations let traders receive higher liquidity rebates than the commissions paid to the broker. Therefore, in certain situations, a direct-access broker can be cheaper and faster than a retail broker.
Would It Be Better to Have One Single Order Routing Option
If all liquidity would go to one exchange, the bid ask spreads should become much tighter. The liquidity would increase, high-frequency algorithms would be stopped from trying to make fractions of a cent by using price differences between ECN’s and exchanges.
However, having only one exchange is equal to having a monopoly, which is usually not a good idea since, without competition, the fee structure might develop in an unfavorable direction for the investor.
Day traders monitor bid vs ask and use stock order types like limit orders to reduce potential slippage since the order improvement only reflects a potential for a better trade execution but is no guarantee to get better fill prices.