Payment For Order Flow

What is a 'Payment For Order Flow'

A payment for order flow is 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.

BREAKING DOWN '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. Brokerage Account

    An arrangement between an investor and a licensed brokerage firm ...
  2. Firm Order

    1. A market order to buy or sell a security for a brokerage's ...
  3. Order

    An investor's instructions to a broker or brokerage firm to purchase ...
  4. Brokerage Company

    A business whose main responsibility is to be an intermediary ...
  5. Limit Order

    An order placed with a brokerage to buy or sell a set number ...
  6. Market Order

    An order that an investor makes through a broker or brokerage ...
Related Articles
  1. Investing Basics

    What's a Brokerage Account?

    A brokerage account is a contractual arrangement between an investor and a licensed securities broker or brokerage.
  2. Professionals

    Order Execution

    Most customer orders, which are market orders or executable limit orders, will be routed electronically to the trading post for automatic execution. The electronic system bypasses the firm’s ...
  3. Investing Basics

    Opening Your First Brokerage Account

    Learn what steps you should take before you open your first brokerage account.
  4. Trading Strategies

    Making The Trade: Understand Order Types

    Buying and selling stock can be a lot like buying or selling a car. Traders should use and understand tools such as market orders, limit orders, day orders, and good-'til-canceled orders to ensure ...
  5. Professionals

    Introduction

    A firm handling a customer’s order is entitled to be compensated for executing the customer’s order. How the firm is compensated depends on the way the firm executes the order. Firms ...
  6. Investing Basics

    Understanding Order Execution

    Find out the various ways in which a broker can fill an order, which can affect costs.
  7. Professionals

    TYPES OF ORDERS

    Order Execution Most customer orders, which are market orders or executable limit orders, will be routed electronically to the trading post for automatic execution. The electronic system bypasses ...
  8. Active Trading Fundamentals

    The Basics Of Trading A Stock

    Taking control of your portfolio means knowing what orders to use when buying or selling stocks.
  9. Professionals

    Introduction

    Guidelines for the practices, which a brokerage firm uses to conduct the operation of its daily business, are regulated by industry, state, and federal regulators. These guidelines are the foundation ...
  10. Professionals

    Types of Securities Orders

    Securities Orders
RELATED FAQS
  1. How do I place an order to buy or sell shares?

    Read a brief overview of how to open a brokerage account, how to buy and sell stock, and the different kinds of trade orders ... Read Answer >>
  2. How can an investor profit from the increase in popularity of discount brokerages?

    Find out how investors benefit when brokerages compete with each other, and how discount brokerages are changing the market ... Read Answer >>
  3. When short selling a stock, how long does a short seller have before covering?

    There are no general rules regarding how long a short sale can last before being closed out. A short sale is a transaction ... Read Answer >>
  4. Why are most brokerage firms owned by banks?

    Learn about the differences between investing with a bank-owned brokerage firm or with an independent broker. Get real answers ... Read Answer >>
  5. What's the difference between a market order and a limit order?

    Buy and sell trades with market orders at the present stock price and execute limit orders if the stock price falls within ... Read Answer >>
  6. How do financial advisors execute trades?

    Understand how financial advisors normally execute an investor's trades. Learn about the different type of markets and exchanges ... Read Answer >>
Hot Definitions
  1. Law Of Demand

    A microeconomic law that states that, all other factors being equal, as the price of a good or service increases, consumer ...
  2. Cost Of Debt

    The effective rate that a company pays on its current debt. This can be measured in either before- or after-tax returns; ...
  3. Yield Curve

    A line that plots the interest rates, at a set point in time, of bonds having equal credit quality, but differing maturity ...
  4. Stop-Limit Order

    An order placed with a broker that combines the features of stop order with those of a limit order. A stop-limit order will ...
  5. Keynesian Economics

    An economic theory of total spending in the economy and its effects on output and inflation. Keynesian economics was developed ...
  6. Society for Worldwide Interbank Financial Telecommunications ...

    A member-owned cooperative that provides safe and secure financial transactions for its members. Established in 1973, the ...
Trading Center