Compensation a broker receives from a market maker for routing customer orders to it.
Under PFOF, a zero-commission broker sends your market-order to a wholesaler such as a large market-maker, which pays the broker a fraction of a cent per share and fills the order, usually slightly inside the public bid-ask-spread.
The tradeoff is transparency. You get price improvement relative to the public quote, but the broker has an incentive to route for payment rather than best execution. The sec requires disclosure of these arrangements.
Example: a broker earns $0.002 per share. On a 1,000-share order that is $2, paid by the wholesaler, not you directly, but it explains how a commission-free trade is not actually free.
Original diagrams for the ideas on this page. Illustrative, not real market data.
The bid-ask spread. Buy orders sit below, sell orders above, and the gap between the best bid (50.01) and best ask (50.04) is the spread you pay to cross. Bar length shows the size resting at each price.
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