The economics rest on a distinction between kinds of order. Orders from individual investors are, in the aggregate, less likely to be informed about short-term price movement than orders from professional trading firms, so a market maker can quote more tightly against them and expect to keep more of the spread. That predictability has value, and payment for order flow is the price paid for access to it. The wholesaler typically fills the order at a price slightly better than the best published quote, which is genuine value to the customer, and still keeps enough of the spread to fund both its own margin and the payment to the broker.
Because the routing decision determines the broker's revenue, the SEC regulates it through disclosure rather than prohibition, and the disclosure is unusually specific. Under Rule 606, at 17 CFR 242.606(a), every broker must publish a quarterly report covering its routing of customer orders, broken down by calendar month, with a separate section for stocks in the S&P 500, other national market system stocks, and listed options. The report must identify the ten venues receiving the most orders and any venue receiving five percent or more, and for each of them must state "the net aggregate amount of any payment for order flow received, payment from any profit-sharing relationship received, transaction fees paid, and transaction rebates received, both as a total dollar amount and per share", separately for market orders, marketable limit orders, non-marketable limit orders and other orders.
Rule 606(a)(1)(iv) goes further and requires a written discussion of the material aspects of the broker's relationship with each of those venues, including any terms "that may influence a broker's or dealer's order routing decision". The rule names four such terms explicitly: incentives for meeting or exceeding an agreed order-flow volume, disincentives for falling short, volume-based tiered payment schedules, and agreements about the minimum amount of flow the broker will send. Those are the arrangements that turn a per-share payment into a reason to concentrate flow at one venue.
There is a second layer aimed at the individual customer. Rule 607, at 17 CFR 242.607(a), requires a broker to inform each customer in writing, on opening an account and annually thereafter, of its policies on receiving payment for order flow, "including a statement as to whether any payment for order flow is received for routing customer orders and a detailed description of the nature of the compensation received", and of how it decides where to route orders that are subject to payment, "including a description of the extent to which orders can be executed at prices superior to the national best bid and national best offer." Rule 606(b) adds that on request a customer can be told where their own orders went over the previous six months.
Execution quality is reported separately, under Rule 605 at 17 CFR 242.605, which requires standardized monthly statistics on how orders were executed. The rule contains its own warning about how far those numbers go: the preamble states that "the statistical information required by this section alone does not create a reliable basis to address whether any particular broker-dealer failed to obtain the most favorable terms reasonably available under the circumstances for customer orders." That is a caution worth keeping in view whenever a broker cites its own execution statistics.
How large is the practice? In the economic analysis accompanying its Order Competition Rule proposal, published in January 2023, the SEC reported that payment for order flow "amounted to $235 million in Q1 2022 but was received almost entirely (93.8%) by four firms", and cited estimates indicating that over 90 percent of individual investors' marketable orders are routed to wholesalers. The same analysis records the historical link that this page's companion covers: "just as PFOF brokers led discount brokers into zero-commission trading in 2019, it is possible they too could lead discount brokers back to charging commissions if they stopped receiving PFOF."
That proposal, the Order Competition Rule, would have required many individual investors' orders to be exposed to competition in an auction before a wholesaler could execute them internally. It was never adopted. The Commission formally withdrew it, along with a proposed Regulation Best Execution, on 17 June 2025, stating that it "does not intend to issue final rules with respect to these proposals." So the position today is the one described above: payment for order flow is lawful, is disclosed under Rules 606 and 607, and is not subject to any additional rule the SEC has adopted since.
