Explaining Payment For Order Flow

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Ever wonder how online stock trading has become commission-free? We know the exchanges charge a fee for trades, and the brokers incur costs to operate and to make profit. Brokers started offering commission-free trades, around the same time the started selling deal flow.

What is Deal Flow?

Retail investors placing orders, is very valuable. That is, it is very valuable to know what kinds of trades they are place and for how much. When a buyer and seller agree on a price, to exchange a security, this is considered a deal. Deal flow, describes these orders flowing through the order books and the trading system. Very valuable information. Market-makers pay a steep premium for this data. Here's a samle of what one broker made in the 2nd quarter of this year. According to the 606 filing with the SEC, they brought in $217 million.