CoachPayment for order flow (PFOF) is a payment by an executing firm to a broker in return for the broker routing its customers’ orders to that firm. Price improvement is the amount by which an execution is better than the national best quote on the customer’s side at the time: for a purchase, the national best offer less the price paid.
Examples
Example 10.6 (Reading one fill)
The national best quote is ; a customer’s market purchase of 100 shares is filled at 20.018. Price improvement: 0.2 cent a share, 20 cents on the order. Effective half-spread: cent. Five minutes later the mid is 20.013: the realised half-spread is cent and the price impact 0.3 cent. The wholesaler’s gross revenue on this fill was 50 cents, out of which it pays the broker and its own costs.
Example 10.10 (An enforcement case)
In December 2020 the SEC charged Robinhood Financial with misleading customers about its revenue sources and with failing its duty of best execution; the firm agreed to pay $65 million without admitting or denying the findings. The order found that between 2015 and late 2018 the broker’s customer communications omitted payment for order flow, its largest source of revenue, and that it had accepted unusually high payments in exchange for lower price improvement: its customers’ executions were $34.1 million worse than at competing brokers, even after allowing for the commissions they did not pay.