Why understanding Payment for Order Flow (PFOF) is important if you trade and invest Why understanding Payment for Order Flow (PFOF) is important if you trade and invest Why understanding Payment for Order Flow (PFOF) is important if you trade and invest

Why understanding Payment for Order Flow (PFOF) is important if you trade and invest

Thought Leadership 3 minutes to read
Adam Reynolds

APAC CEO of Saxo

Summary:  As more people participate in global capital markets, brokers have a real duty of care to their clients and we believe that it is time for regulators in Asia and the brokerage industry to review such practices and collectively work towards protecting the interests of retail clients.

Since 2020, we have seen an acceleration of a global trend expedited by the pandemic, of more people taking greater control over their savings and investments. This greater participation and empowerment of retail investors will remain a dominant market force for the foreseeable future. 

As more people now access the capital markets, it’s more important than ever that investors are given better access to company and trading data, to improve their access to funding and broaden their investment opportunities.

Most recently, the European Commission has taken steps to follow the Australian Securities & Investments Commission (ASIC)’s position in banning the practice of Payment for Order Flow (PFOF), to circumvent the emergence of Payment For Order Flow arrangements. This is a critical move that will level the playing field for investors and bring more transparency, so that clients know they are not selling their flow to market makers. 

But what is Payment For Order Flow, and why is it important for retail investors to be sure their brokers are not practising it?

What is Payment For Order Flow (PFOF)?
Payment For Order Flow (PFOF) is the compensation a brokerage firm receives for directing orders to a particular venue for trade execution. The brokerage firm receives payment, usually fractions of a penny per share, as compensation for routing the order to a specific market maker.

Payment For Order Flow is a method of transferring some of the profit from market making to the brokers that route customer orders to the market maker. In this manner, the broker generates an additional source of income, while the market maker ensures retail volume is being routed their way, which in return simplifies their practice of market making (matching buy and sell orders) and ultimately leads to higher profits for the market maker as well.

Why should retail investors care?
The most common criticism of Payment For Order Flow is the fact that a broker is receiving fees from a third party without a client's knowledge. Such payments incentivise the broker to route its orders to a particular venue, which naturally could be considered a conflict of interest. The broker may choose to send the order to the venue offering the highest payment to the broker rather than the best execution to the client. 

Moreover, as this process has become so widespread that it is reducing liquidity and likely influencing prices at exchanges – with orders executed elsewhere - it has proved controversial, and is receiving attention from regulators around the world.

For many low-cost brokers offering zero or low commissions on equity transactions, Payment For Order Flow is a major source of revenue. This practice could cause a conflict of interest between broker and client as the brokerage firm might be tempted to route orders to a particular market maker for their own benefit, rather than seeking a best execution price for the investor, their client.

Further, many of the market makers to whom order flow is sold are hedge funds. As such, they are in a position to use the information in the flow to inform their own algorithmic trading decisions, and to trade with very high frequency in the market, much more so than any retail investor ever could. Investors are often unaware that their orders are sold to hedge funds, and of the impact this can have. 

Investors who trade infrequently or in small quantities may not feel the impact from this practice. However, frequent traders and those trading large volumes should aim to understand their broker’s order routing system to make sure that they’re not losing out on price improvement due to their broker prioritising PFOF.

Technology as a way to level the playing field
At Saxo, we do not use or receive Payment For Order Flow (PFOF). Saxo executes equity orders using smart order routing (SOR) technology, which sources liquidity from multiple venues, including regulated exchanges and MTFs, to optimise execution rates and fill ratios. SOR is an algorithm which automatically compares execution prices for any given buy or sell order. It avoids conflicts of interest by discovering best available prices and routing your orders to the venue offering best execution independent of Payment For Order Flow.

In short, we source the best price available for the client, and we aren’t distracted by which hedge fund we can sell our clients’ orders to. 

As more people participate in global capital markets, brokers have a real duty of care to their clients and we believe that it is time for regulators in Asia and the brokerage industry to review such practices and collectively work towards protecting the interests of retail clients. 


The Saxo Group entities each provide execution-only service, and access to analysis permitting a person to view and/or use content available on or via the website is not intended to and does not change or expand on this. Such access and use are at all times subject to (i) The Terms of Use; (ii) Full Disclaimer; (iii) The Risk Warning; (iv) the Inspiration Disclaimer and (v) Notices applying to Trade Inspiration, Saxo News & Research and/or its content in addition (where relevant) to the terms governing the use of hyperlinks on the website of a member of the Saxo Group by which access to Saxo News & Research is gained. Such content is therefore provided as no more than information. In particular, no advice is intended to be provided or to be relied on as provided nor endorsed by any Saxo Group entity; nor is it to be construed as solicitation or an incentive provided to subscribe for or sell or purchase any financial instrument. All trading or investments you make must be pursuant to your own unprompted and informed self-directed decision. As such no Saxo Group entity will have or be liable for any losses that you may sustain as a result of any investment decision made in reliance on information which is available on Saxo News & Research or as a result of the use of the Saxo News & Research. Orders given and trades effected are deemed intended to be given or effected for the account of the customer with the Saxo Group entity operating in the jurisdiction in which the customer resides and/or with whom the customer opened and maintains his/her trading account. Saxo News & Research does not contain (and should not be construed as containing) financial, investment, tax or trading advice or advice of any sort offered, recommended or endorsed by Saxo Group and should not be construed as a record of our trading prices, or as an offer, incentive or solicitation for the subscription, sale or purchase in any financial instrument. To the extent that any content is construed as investment research, you must note and accept that the content was not intended to and has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such, would be considered as a marketing communication under relevant laws.

Please read our disclaimers:
Notification on Non-Independent Investment Research (https://www.home.saxo/legal/niird/notification)
Full disclaimer (https://www.home.saxo/en-sg/legal/disclaimer/saxo-disclaimer)

None of the information contained here constitutes an offer to purchase or sell a financial instrument, or to make any investments. Saxo Markets does not take into account your personal investment objectives or financial situation and makes no representation and assumes no liability as to the accuracy or completeness of the information nor for any loss arising from any investment made in reliance of this presentation. Any opinions made are subject to change and may be personal to the author. These may not necessarily reflect the opinion of Saxo Markets or its affiliates.

Saxo Markets
88 Market Street
CapitaSpring #31-01
Singapore 048948

Contact Saxo

Select region


Saxo Capital Markets Pte Ltd ('Saxo Markets') is a company authorised and regulated by the Monetary Authority of Singapore (MAS) [Co. Reg. No.: 200601141M ] and is a wholly owned subsidiary of Saxo Bank A/S, headquartered in Denmark. Please refer to our General Business Terms & Risk Warning to consider whether acquiring or continuing to hold financial products is suitable for you, prior to opening an account and investing in a financial product.

Trading in financial instruments carries various risks, and is not suitable for all investors. Please seek expert advice, and always ensure that you fully understand these risks before trading. Trading in leveraged products such as Margin FX products may result in your losses exceeding your initial deposits. Saxo Markets does not provide financial advice, any information available on this website is ‘general’ in nature and for informational purposes only. Saxo Markets does not take into account an individual’s needs, objectives or financial situation.

The Saxo trading platform has received numerous awards and recognition. For details of these awards and information on awards visit www.home.saxo/en-sg/about-us/awards.

The information or the products and services referred to on this website may be accessed worldwide, however is only intended for distribution to and use by recipients located in countries where such use does not constitute a violation of applicable legislation or regulations. Products and Services offered on this website are not intended for residents of the United States, Malaysia and Japan. Please click here to view our full disclaimer.

This advertisement has not been reviewed by the Monetary Authority of Singapore.

Apple and the Apple logo are trademarks of Apple Inc, registered in the US and other countries and regions. App Store is a service mark of Apple Inc. Google Play and the Google Play logo are trademarks of Google LLC.