What Is “Payment for Order Flow” (PFOF) in the Context of Options Trading?

Payment for Order Flow (PFOF) is a practice where a retail brokerage receives compensation from a market maker for directing customer trade orders to them for execution. The market maker is willing to pay for this order flow because they can profit from the bid-ask spread by executing the trade.

PFOF is a significant revenue source for many commission-free brokerages, but critics argue it creates a conflict of interest, as the broker's incentive may not align with securing the best possible execution price for the client.