The fleecing of retail investors continues as “payment for order flow” expands.

Payment for order flow (PFOF) is not new. Previously, in a less connected world of instantaneous data flows, PFOF was minimal and non-invasive. Today, with high-frequency trading, dark pools, and algorithms running amok, retail traders are fodder for Wall Street profits.

Some Background

In financial markets, PFOF refers to compensation a broker receives third parties to influence how the broker routes client orders for fulfillment.

Read that again.

For many years, paying for order flows allowed firms to centralize customers’ orders for another firm to execute. Such allowed smaller firms to use economies of scale of larger firms. By allowing small firms to combine orders with larger firms, it provided better execution quality.

Over the years, the decimalization of the trading securities diminished the profitability of trade execution. Such pushed Wall Street toward PFOF as a way to generate revenue and subsidize the move to zero-commissions.

The advances in technology and data analysis increased the speed with which information gets sent and received. Over the last decade, Wall Street spent billions to figure out ways to take advantage of the data and “game the system.”

Today, Robinhood, and others, generate the bulk of their revenues from selling order flows to the highest bidder.

Free Isn’t Necessarily “Free”

Think about this carefully. If a firm is selling order flow to the highest bidder, even though you are paying “zero commissions,” you are not necessarily getting the best execution.

In other words, “free” isn’t necessarily “free.”