The Old Model: Commissions
Before 2019, most retail brokers charged explicit commissions for each trade — typically $4.95 to $9.99 per trade depending on the broker. These commissions were a direct, visible cost to investors. In October 2019, following Schwab's announcement of zero commissions, the industry rapidly moved to commission-free trading. The commissions disappeared; so did the transparency about what trading actually costs.
The New Model: PFOF
Under the PFOF model, the broker does not charge the investor a commission. Instead, the broker routes the investor's order to a wholesale market maker — primarily Citadel Securities — that pays the broker for the order. The market maker captures the bid-ask spread on the execution. The investor does not see this cost as a line item; it is embedded in the execution price.
Comparing the Costs
For a small order, PFOF-based execution quality can be better or worse than the old commission model, depending on the spread and any price improvement. For large orders, the embedded cost in the spread can exceed what a commission would have been. Studies suggest that for frequent traders with larger orders, the zero-commission model with PFOF may actually cost more than the old commission model, once execution quality differences are accounted for.
The Transparency Problem
A key problem with PFOF-funded trading is that the cost is hidden. Investors cannot easily determine what price they 'should' have received on a trade, and the difference between actual execution and theoretical best execution is not visible on any trade confirmation. This opacity is, in The Ethics Reporter's view, a design feature of PFOF that benefits market makers and brokers at the expense of investor awareness.