Explain the Difference between PFOF in Options versus Stock Trading ▴ Learn

Explain the Difference between PFOF in Options versus Stock Trading.

PFOF is generally more prevalent and lucrative in options trading than in stock trading because options often have wider bid-ask spreads, providing a larger margin for market makers (wholesalers) to offer price improvement and still pay the broker a rebate. Stock trading spreads are often very tight (penny or sub-penny), leaving less room for the wholesaler's profit and the PFOF payment.

The complexity and higher risk of options also contribute to the wider spreads.

Why Do Market Makers Prefer to Trade at the Bid or Ask Rather than the Mid-Price?

Define “Exotic Options” and Explain Why Their Spreads Are Typically Wider than Vanilla Options

What Incentives Do Exchanges Offer to Market Makers to Ensure Narrow Spreads?

How Does the Moneyness (ITM, OTM, ATM) of an Option Affect Its Bid-Offer Spread?