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The Good, The Bad & The Ugly of Payment for Order Flow

May 3, 2021

Not sure what to think about the controversy around payment for order flow (PFOF)? While lots of opinions have circulated since GME-gate in January, we think there’s a lot more to consider than what’s covered in the articles you’ve read so far.

In our latest paper, we break down the market structure of retail trading, introduce the topics left undiscussed to date, and support our assessment with analytics. We address:

  • How wholesaling is different from market making on exchanges
  • How much price improvement retail investors really get by routing orders to wholesalers and how it compares to price improvement on exchanges
  • How much the bid-offer spread would narrow if retail order flow moved to exchanges
  • Is the current wholesale structure monopolistic? How information asymmetry between wholesalers and exchange market makers affects bid-offer spreads