PFOF in Options Is Larger
Options contracts have wider bid-ask spreads than stocks, which means there is more opportunity for market makers to profit from each execution and more room to pay PFOF to brokers. Per-contract PFOF rates in options are typically much higher than per-share rates in equities. This means that brokers' incentives to route options orders to PFOF market makers may be even stronger than in equities.
Citadel's Options Market Making
Citadel Securities is a major options market maker in addition to its equity operations. The firm makes markets across equity options, index options, and ETF options. Its scale in options market-making gives it similar information and execution advantages in options to those it holds in equities.
Options Execution Quality
The bid-ask spread in options can be substantially wider than in highly liquid equities. For retail options traders, the execution price relative to the mid-point of the bid-ask spread is a key measure of execution quality. Studies have found that options execution quality varies significantly across brokers and market makers, with PFOF arrangements again creating potential conflicts.
Regulatory Focus on Options PFOF
The SEC's 2022 market structure reform proposals specifically addressed options PFOF as well as equity PFOF. Options market structure has received increasing regulatory attention as retail options trading has grown substantially — a trend accelerated by zero-commission options trading and mobile app accessibility. The regulatory treatment of options PFOF is an evolving area.