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Chapter · Master Robinhood

Payment for order flow

When you tap buy, Robinhood does not fill the order itself. It routes your order to a large trading firm called a market maker, which completes the trade. The market maker pays Robinhood a small amount for sending that order. This is payment for order flow, or PFOF. Supporters say it funds commission free trading and can give you a slightly better price than the public quote, called price improvement. Critics say it creates a conflict, because Robinhood may be tempted to route where it earns most, not where you get the best fill.

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What you get asked

  1. Put the payment for order flow process in order

    Your tap starts a chain. Robinhood hands the order to a market maker, the trade fills, and Robinhood collects a small payment for sending it there.

  2. What is the main criticism of payment for order flow?

    The worry is incentives. If a broker is paid to route orders, it might favor the firm that pays most rather than the one that fills your order best. Regulators watch this closely.

  3. Getting a slightly better price than the public quote is called price ___.

    Price improvement means your fill beats the quoted price by a little. Brokers point to it as a benefit of PFOF, though how much you actually get can vary.

  4. In 2020 the SEC settled with Robinhood over PFOF for what reason?

    In December 2020 Robinhood paid a 65 million dollar SEC settlement over misleading statements about how it made money and whether customers got the best execution. It did not admit or deny the findings.

  5. Match each PFOF term to its meaning

    These four terms are the heart of the PFOF debate. Brokers have a duty of best execution, and PFOF is the practice that puts that duty under scrutiny.

The rest of this chapter

Learn how Robinhood works, how it makes money, and how to trade with discipline instead of hype.