Payment For Order Flow
Definition of 'Payment For Order Flow'
The compensation and benefit a brokerage receives by directing orders to different parties to be executed. The brokerage firm receives a small payment, usually a penny per share, as compensation for directing the order to the different parties.
Investopedia explains 'Payment For Order Flow'
This is a major benefit for smaller brokerage firms, which can't handle thousands of orders. In effect, this allows them to send off their orders to another firm to be bundled with other orders to be executed. This helps brokerage firms keep their costs lower. The market maker or exchange benefits from the additional share volume it handles, so it compensates brokerage firms for directing traffic.
Your brokerage firm is required by the SEC to inform you if it receives payment for sending your orders to specific parties. It must do this when you first open your account as well as on an annual basis. The firm must also disclose every order on which it receives payment.