Explain the Difference between PFOF in Options versus Stock Trading ⎊ Path

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.

What Is the Role of a “Wholesaler” in Providing Price Improvement in Options Trading?

Define the Term ‘Bid-Ask Spread’ and Its Relevance to Stop-Limit Placement

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

Explain the Relationship between an Asset’s Bid-Ask Spread and Its Required Minimum RFQ Size

How Does the Bid-Ask Spread on the Underlying Asset Affect the Cost of Delta Hedging?

How Do Centralized Exchanges (CEX) and Decentralized Exchanges (DEX) Typically Compare in Terms of Bid-Offer Spreads?

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

Why Is the Bid-Ask Spread a Major Risk Factor for Box Spreads in Illiquid Crypto Markets?

Glossar

Stock Trading

Execution ⎊ The application of trading strategies within cryptocurrency markets, options exchanges, and derivative platforms represents a sophisticated intersection of quantitative finance and real-time market dynamics.

Pfof

Payment ⎊ Payment for Order Flow (PFOF) is the financial compensation a retail brokerage firm receives from a market maker in exchange for routing its clients' non-directed order flow to that specific market maker for execution.