payment for order flow


Also found in: Acronyms.

Payment for Order Flow

A payment that a dealer makes to a brokerage in exchange for the brokerage sending business the dealer's way. For example, if a brokerage's client offers to sell 2,000 shares of a stock, the brokerage may receive a payment for order flow of three cents per share if it sells the stock to a certain dealer. Brokerages and dealers make payment for order flow arrangements ahead of time; they are advantageous to brokerages because of the revenue, while they enable dealers to make transactions they might not have made otherwise. Critics contend that this system encourages brokerages to act in the best interest of themselves (or the dealers), rather than their clients.

payment for order flow

The payment by a dealer to a broker acknowledging the broker's routing of customer orders to the dealer. For example, a specific market maker on a regional exchange might agree to pay a brokerage firm 2¢ per share for orders directed to the market makers. Payment for order flow has been criticized as an incentive to brokers to send orders to dealers from whom the brokers will receive the highest payment rather than to dealers who would provide the customer with the best available price.
Case Study In October 1995, Charles Schwab Corporation announced the firm would end the practice of payment for order flow. Schwab officials said the firm had been paying about 125 brokerage firms an average of 2¢ per share to route customer orders to its Mayer & Schweitzer subsidiary, which at the time was processing approximately 8% of Nasdaq's daily volume. The announcement came at least partly in response to pressure from both the Justice Department and the Securities and Exchange Commission. The concern was that payment for order flow raised questions about whether customer orders were receiving fair treatment; brokerage firms might send the orders to dealers who offered the highest payment for order flow rather than to dealers offering the best price to the customer. Shortly after the Schwab announcement, Merrill Lynch disclosed that the firm would stop automatically sending small orders for New York Stock Exchange-listed securities to the Boston and Pacific stock exchanges where it maintained dealer operations. Merrill said it would continue to send customer orders to the regional exchanges but only if these exchanges offered the best prices.
Mentioned in ?
References in periodicals archive ?
In sessions with payment for order flow, participants also reveal their rebate, and the market rebate is determined.
com Institutional's(R) direct access technology, institutional investors are provided the best execution methods by avoiding payment for order flow and the practice of trading against customer orders.
The practice of payment for order flow flies in the face of best execution requirements and leaves investors at risk by exposing them to possible conflicts of interest," said Mr.
The Amex said it would begin by charging 40 cents a contract across the board for orders of 200 contracts or less and will charge specialists and market makers for trades of firms that accept payment for order flow.
We were the first to offer trading in decimals and the first to rebate payment for order flow.
Eccleston said, "This award reaffirms that online brokerage firms such as E*Trade Securities have greater customer protection responsibilities under the securities laws than simply to execute trades in return for lucrative payment for order flow and margin interest.
The rise in multiple listings, electronic exchanges and payment for order flow are just some of the issues dramatically impacting the competitive landscape of the options industry," said Kennedy.
The software allows traders to bypass market makers, who are used by most online brokers to process orders in exchange for payment for order flow.
We believe that payment for order flow, unless rebated back to customers, has the potential to distort the formation of efficient markets.
A newly released poll of Wall Street traders, market makers, specialists and other financial industry professionals may help the Securities and Exchange Commission (SEC) pick one side of the fence or the other on the payment for order flow issue.
com's policy of not accepting payment for order flow helps ensure that customers receive the best available execution.
Datek Online receives very little payment for order flow compared with most brokerage firms that serve individual investors.