How PFOF Works
When you place a trade on a discount broker like Robinhood or TD Ameritrade, your order typically does not go directly to a stock exchange. Instead, the broker routes it to a wholesale market maker — frequently Citadel Securities — that pays the broker a per-share fee for the order. The market maker executes the trade, capturing the bid-ask spread, and the broker keeps the PFOF payment, which funds 'commission-free' trading.
Robinhood's Documented PFOF Revenue
Bloomberg reported in October 2018 that 40% of Robinhood's revenue came from selling customer orders to firms including Citadel Securities. In 2020, SEC documents related to the Robinhood settlement revealed that Citadel Securities paid Robinhood approximately $1.5 billion in PFOF during that year alone. These figures illustrate the scale of the PFOF market and Citadel's central role in it.
The Regulatory Debate
PFOF has been debated by the SEC for years. Former SEC Chair Gary Gensler raised concerns about conflicts of interest and best execution. The SEC proposed rules in 2022 that would have required broker-dealers to submit retail orders to competitive auctions before routing them to market makers. The proposal drew significant industry pushback. Payment for order flow has been banned or substantially restricted in the United Kingdom, Canada, and the European Union.
What the SEC Found in the Robinhood Case
In December 2020, the SEC charged Robinhood with failing to disclose PFOF conflicts and providing clients with inferior execution prices 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 period. The SEC's settlement was with Robinhood, not with Citadel Securities.