The Academic Evidence
Multiple peer-reviewed studies have found that retail investors receive materially worse execution prices when their orders are routed through PFOF arrangements. A 2021 study by the SEC's Division of Economic and Risk Analysis found that PFOF-receiving brokers achieved worse execution quality on average. A Berkeley study estimated PFOF costs retail investors approximately $1.5 billion annually in foregone price improvement.
The Robinhood Settlement
In 2020, the SEC charged Robinhood with failing to disclose PFOF conflicts and achieving inferior execution prices for customers from 2015 to 2018. Robinhood paid $65 million to settle. The SEC found that customers received execution prices 'inferior to what Robinhood could have achieved if it had routed orders to different trading centers' — by approximately $34.1 million over the relevant period.
Citadel's Revenue Model
Citadel Securities is not a charity. It is a profit-maximizing firm that paid Robinhood approximately $1.5 billion in PFOF in 2020 alone. This payment was rational: Citadel captured more value from executing Robinhood's customers' orders than it paid Robinhood for them. The mathematical implication is that retail investors subsidized Citadel's profit through inferior execution — by at least the amount Citadel paid, and likely more.
The Meme Stock Precedent
During the January 2021 GameStop trading frenzy, Robinhood restricted purchases of GME and other meme stocks — citing capital constraints. Critics noted that Citadel Advisors (the hedge fund) held a short position in GameStop, and that Citadel Securities (the market maker) was Robinhood's primary counterparty. While no legal finding of coordination has been made, the episode exposed the structural conflict at the heart of the PFOF relationship.