For decades, retail traders have assumed their brokers simply match their buy and sell orders to the market — a neutral middleman helping execute trades. But the rise of zero-commission trading in the 2010s pulled back the curtain on a different reality: brokers often make money not from charging you fees, but from selling the right to execute your orders to third parties.
Critics call it the order flow conspiracy — a behind-the-scenes system where big market-making firms pay brokers for the privilege of handling your trades, profiting from the tiny differences between buying and selling prices. Supporters say it’s just market microstructure in action, making trading cheaper and faster. Skeptics argue it’s a quiet conflict of interest that can cost retail traders more than they realize.
What Is “Order Flow” in the First Place?
When you click buy or sell on your broker’s app, your order is “flow” — a data packet containing:
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The security you want to trade
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The quantity
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Whether you’re buying or selling
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Any price limits you’ve set
Retail brokers rarely send this order directly to a stock exchange. Instead, many route it to market makers — specialized trading firms that match buyers and sellers (or trade against the order themselves).
Payment for Order Flow (PFOF): The Core Mechanism
Payment for order flow (PFOF) is when a market maker pays a broker for sending them that order. The market maker then executes the trade and earns money on the bid-ask spread — the tiny gap between what buyers will pay and what sellers will accept.
Example:
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Best public market price for a stock: $10.00 bid / $10.01 ask
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You place a market buy order
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Market maker sells to you at $10.005, giving you a slightly better price than $10.01
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They bought at $10.00 and sold at $10.005 — earning $0.005 per share
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They also paid your broker a small fee (fractions of a cent per share) for sending them the order
Why PFOF Exists
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Market Makers Want Volume: The more orders they handle, the more opportunities to earn on small price differences.
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Brokers Want Revenue: PFOF lets them offer commission-free trading without losing income.
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Regulators Allow It (with Rules): In the U.S., SEC rules require brokers to seek “best execution” — meaning your trade must be filled at a price as good as or better than the best available on public exchanges.
The Conspiracy Theory Angle
Critics argue that this cozy arrangement creates hidden conflicts:
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Incentives to Route Orders for Profit, Not Price: A broker might choose the market maker who pays the most, not the one who consistently gives the best execution.
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Internalization of Trades: Orders may never hit public exchanges, reducing transparency and potentially affecting price discovery.
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Information Advantage: Market makers see a flood of incoming orders before the broader market, allowing them to adjust their trading strategies.
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Spread Capture from Retail Flow: Retail orders are often predictable and low-risk for market makers, making them particularly valuable.
This is where the term “order flow conspiracy” comes from — the idea that zero-commission brokers aren’t really free; you’re paying in the form of slightly worse prices and contributing to a private trading ecosystem.
The Robinhood Spotlight
The 2021 GameStop saga brought PFOF into the headlines. Robinhood, a pioneer of commission-free trading, disclosed in regulatory filings that it made a large portion of its revenue from selling order flow to firms like Citadel Securities and Virtu Financial. Critics argued that during the meme stock frenzy, the relationship between brokers and market makers created both perception and reality problems for retail traders.
How Brokers Defend PFOF
Brokers argue:
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Better Prices: They often claim to beat the national best bid/offer (NBBO) thanks to price improvement from market makers.
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Faster Execution: Market makers can execute trades in microseconds, reducing slippage.
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Access to Free Trading: Without PFOF, commission-free trading for millions of small investors might not exist.
In fact, many brokers publish price improvement statistics showing how much better their customers did compared to NBBO quotes.
The Regulatory Landscape
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U.S. SEC: Requires disclosure of PFOF relationships (Rule 606) and mandates best execution.
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UK & EU: Ban PFOF entirely, citing conflicts of interest. Brokers must route orders in a way that prioritizes best execution above all else.
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Canada & Australia: Have restrictions but not outright bans, with varying disclosure requirements.
The debate over whether the U.S. should follow Europe’s lead intensified after the meme stock episodes of 2021.
The Profit Chain in Order Flow
Here’s how the money moves:
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Retail Trader submits order →
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Broker sells order to →
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Market Maker executes trade and profits from spread →
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Broker gets a rebate from the market maker →
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Retail Trader pays nothing in commission, but potentially a fraction of a cent more per share than in a perfect market.
For small trades, the difference may be negligible. For large orders, or millions of trades over time, the costs add up — for someone.
The Role of Dark Pools
Not all order flow goes to traditional market makers. Some is routed to dark pools — private trading venues where large blocks of shares are exchanged anonymously. While dark pools were designed for institutional investors, some retail flow can end up there indirectly, adding another layer of opacity.
Historical Context: From Commissions to PFOF
Before the 1970s, brokers charged fixed commissions. In 1975, the U.S. deregulated commissions, sparking competition and fee cuts. By the late 1990s, discount brokers like E*TRADE and Ameritrade were offering low-cost trades, sometimes subsidized by early forms of order flow arrangements. The rise of high-frequency trading in the 2000s supercharged the value of retail flow — and by the 2010s, zero-commission trading had become the norm, driven by PFOF.
Evidence for and Against Harm to Retail Traders
Studies finding minimal harm:
Some academic research suggests retail traders often get prices equal to or slightly better than public market quotes, thanks to price improvement.
Studies raising concerns:
Other analyses argue that PFOF can fragment markets, reduce displayed liquidity, and allow market makers to profit disproportionately from uninformed order flow.
The truth may depend on market conditions — in calm markets, price improvement is common; in volatile markets, execution quality may vary more widely.
Who Really Gains From Order Flow
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Brokers: Direct revenue from PFOF arrangements, enabling “free” trading.
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Market Makers: Profits from spread capture and information about retail sentiment.
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High-Frequency Traders: Use order flow data to optimize their strategies.
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Some Retail Traders: Indirectly benefit from free commissions and price improvement — though possibly at the cost of full transparency.
The Ethical Question
The order flow model forces a trade-off:
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Is it better to have free, easy access to markets with a hidden cost in execution quality?
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Or should all orders go through transparent exchanges, possibly bringing back commissions?
It’s a classic market structure debate: efficiency and access versus purity and transparency.
The Future of PFOF
In 2022, the SEC proposed new rules to increase competition for retail orders — potentially requiring brokers to route them into auctions where multiple market makers compete to offer the best price. If implemented, this could disrupt the current bilateral PFOF arrangements and reduce concerns about routing conflicts.
Some brokers are already shifting models. Fidelity, for example, routes most orders to exchanges and does not accept PFOF for stock trades, positioning itself as a “conflict-free” execution provider.
Bottom Line
The “order flow conspiracy” isn’t about shadowy cabals rigging the market; it’s about a legal, profitable, but controversial system where brokers and market makers monetize your trades in ways most retail investors never see. Whether you view it as a hidden tax on trading or a clever way to democratize market access depends on how much you value transparency versus free access.
But one thing is certain: if you’re not paying for the product, you are the product. In retail trading, that product is your order flow.
