Options PFOF: Less Regulated, More Complex
In options markets, payment for order flow arrangements allow market makers like Citadel to pay for retail options orders — and then execute them at prices that capture the bid-ask spread in the options market. Options spreads are typically much wider than equity spreads, meaning the extraction of value from retail options traders is proportionately larger per dollar traded.
The Retail Options Trading Boom
The post-2020 explosion in retail options trading — driven by Robinhood and similar platforms — has significantly increased the size of the retail options order flow that flows to Citadel. Millions of retail investors who have never understood options are placing options trades that are immediately routed to Citadel Securities for execution at spreads that benefit the market maker.
Regulatory Response to Options PFOF
The SEC and FINRA have applied the same disclosure-based approach to options PFOF as to equity PFOF. This approach is inadequate for options markets where pricing complexity makes execution quality comparisons nearly impossible for retail investors.