payment for order flow


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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.
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Existing industrial practice in order routing such as payment for order flow and internalization becomes a serious threat to the power of competition in our marketplace.
In sessions with payment for order flow, participants also reveal their rebate, and the market rebate is determined.
In sessions with payment for order flow, we also ask participants an open-ended question concerning cooperation in setting rebates.
The final panel of Table 2 reports the spread per period for the six sessions with preferencing and payment for order flow (sessions 13-18).
Finally, using data from the six sessions with preferencing and payment for order flow, we find that communication is significant at p [less than] 0.
Fixed commissions can affect the e-brokerages that depend on payment for order flow as a source of revenue.
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.
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.
The latest member poll by the Security Traders Association (STA) shows that more than 65 percent of respondents indicated the SEC should ban at least some types of payment for order flow by securities trading firms.
Payment for order flow continues to be a controversial issue, but the Securities and Exchange Commission (SEC) has not yet taken a position on the issue.
com's policy of not accepting payment for order flow helps ensure that customers receive the best available execution.