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. Firm Order

    1. A market order to buy or sell a security for a brokerage's ...
  2. Brokerage Account

    An arrangement between an investor and a licensed brokerage firm ...
  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. Pairing Off

    An illegal practice of a brokerage firm offsetting short and ...
Related Articles
  1. Investing

    What's a Brokerage Account?

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

    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 ...
  3. Investing

    Opening Your First Brokerage Account

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

    Understanding Order Execution

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

    The Basics Of Trading A Stock

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

    Explaining Market Orders

    A market order is the most common order used to purchase a financial security.
  7. Trading

    Basics Of The Mechanics Behind Electronic Trading

    What was once associated with shouting traders and wild hand gestures has now become more closely associated with statisticians and computer programmers.
  8. Financial Advisor

    Varieties Of Brokers And How To Pick The Best One

    Figuring out what kind of broker to use can be a daunting task. The key is figuring out just how much help you need.
  9. Trading

    Evaluating Executive Compensation

    Find out how to determine whether a CEO is being overpaid.
  10. Investing

    What is a Prime Brokerage?

    A prime brokerage offers special services to certain clients.
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. 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 >>
  5. 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 >>
Hot Definitions
  1. Cash Flow

    The net amount of cash and cash-equivalents moving into and out of a business. Positive cash flow indicates that a company's ...
  2. PLUS Loan

    A low-cost student loan offered to parents of students currently enrolled in post-secondary education. With a PLUS Loan, ...
  3. Graduate Record Examination - GRE

    A standardized exam used to measure one's aptitude for abstract thinking in the areas of analytical writing, mathematics ...
  4. Graduate Management Admission Test - GMAT

    A standardized test intended to measure a test taker's aptitude in mathematics and the English language. The GMAT is most ...
  5. Magna Cum Laude

    An academic level of distinction used by educational institutions to signify an academic degree which was received "with ...
  6. Cover Letter

    A written document submitted with a job application explaining the applicant's credentials and interest in the open position. ...
Trading Center