What Order Flow Information Contains
An order received by a wholesale market maker contains: the security, the direction (buy or sell), the quantity, the order type, and the time of receipt. Aggregated across millions of orders, this information provides the market maker with a view of near-term retail demand for securities — demand that has not yet been reflected in public market prices.
Legal Uses of Order Flow Information
Market makers legally use order flow information to: price their quotes (setting bids and asks based on observed retail demand patterns), manage risk (hedging positions based on the direction of incoming orders), and improve efficiency (routing and executing orders faster). These uses are accepted aspects of market-making.
Potential for Misuse
The potential for misuse of order flow information — specifically, using knowledge of incoming retail orders to trade ahead of them ('front-running') or to adjust quotes in ways that systematically disadvantage customers — has been a central concern in PFOF regulation. FINRA's $700,000 fine of Citadel Securities in 2020 addressed conduct that, according to FINRA, involved trading for the firm's own account at prices that could have filled customer orders.
The Information Asymmetry at Scale
The information advantage of a market maker that sees the dominant fraction of retail order flow before it reaches public markets is structural and scale-dependent. A market maker seeing 40%+ of retail orders has insights into near-term demand that no other market participant possesses. Whether this asymmetry is adequately regulated is, in The Ethics Reporter's view, a question the regulatory record has not fully resolved.