The common critique of zero-fee trading venues is that the business can’t be profitable.
Below I explain how free trading venues are profitable and why they can offer tighter spreads, by highlighting flow segmentation and latency speed bumps.
What is PFOF?
Payment for Order Flow is a system where a trading platform (broker or exchange) routes customer orders to specific market makers in exchange for a fee. In simple terms, instead of charging you a commission, the platform gets paid by a third-party market maker for the right to fill your order.
The next logical question is: why is this so important?
PFOF enables trading platforms to charge zero taker fees to users while still giving the platform a revenue stream. It creates a sustainable model where you, the trader, pay nothing to trade, yet the business earns income on every order filled (since a market maker pays for each order).
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