Payment For Order Flow

AAA

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.

RELATED TERMS
  1. Limit Order

    An order placed with a brokerage to buy or sell a set number ...
  2. Dealer

    A person or firm in the business of buying and selling securities ...
  3. Agent

    1. An individual or firm that places securities transactions ...
  4. Market Order

    An order that an investor makes through a broker or brokerage ...
  5. Order

    An investor's instructions to a broker or brokerage firm to purchase ...
  6. Broker

    1. An individual or firm that charges a fee or commission for ...
Related Articles
  1. Understanding Order Execution
    Investing Basics

    Understanding Order Execution

  2. Pick the Right Brokerage Account for ...
    Options & Futures

    Pick the Right Brokerage Account for ...

  3. What are the differences among a real ...
    Home & Auto

    What are the differences among a real ...

  4. Using Money Orders
    Budgeting

    Using Money Orders

Hot Definitions
  1. Debit Spread

    Two options with different market prices that an investor trades on the same underlying security. The higher priced option ...
  2. Leading Indicator

    A measurable economic factor that changes before the economy starts to follow a particular pattern or trend. Leading indicators ...
  3. Wage-Price Spiral

    A macroeconomic theory to explain the cause-and-effect relationship between rising wages and rising prices, or inflation. ...
  4. Accelerated Depreciation

    Any method of depreciation used for accounting or income tax purposes that allows greater deductions in the earlier years ...
  5. Call Risk

    The risk, faced by a holder of a callable bond, that a bond issuer will take advantage of the callable bond feature and redeem ...
  6. Parity Price

    When the price of an asset is directly linked to another price. Examples of parity price are: 1. Convertibles - the price ...
Trading Center