Hey there, I’ve read that majority of revenue at Robinhood is coming from payment for order flow. How it works exactly and should I care about it? It seems like a hidden fee…
Brokers choose to order to market makers for better executions (better compared to public exchanges, like NYSE). As a compensation, brokers get payments. That’s why it’s called payment for order flow. There are more brokers not doing this. If you use them, you’ll get better executed prices vs brokers that rely on PFOF. Fidelity is a great example for this.
It’s a common practice and, if anything, allows platforms like Robinhood to offer commission-free trading. It’s a trade-off. You get free trades but give up some potential price improvement. For casual investors, it’s not a bad deal.
For me the controversy isn’t just about PFOF itself but how it’s used and disclosed. I remember that Robinhood got fined for not fully disclosing their reliance on PFOF and how it influences their business model. That lack of transparency is a bigger issue for me than the practice itself.
It’s all about informed consent. If Robinhood or any other platform is upfront about how they operate, including PFOF, then it’s on us as investors to decide if we’re okay with it. The problem arises when the details are hidden or obfuscated. Transparency should be the north star here.