If someone else out there wants to buy 100 shares of Stock X and their brokerage uses the same middleman for order flow, the company in the middle could intercept the trade, route the trade on its own and capture a small profit. This order never goes through a major stock exchange. If your brokerage participates in PFOF, the sale may not go right to the New York Stock Exchange or Nasdaq. Instead, a middleman company will quickly analyze the transaction to decide if it can profit from the order by managing the trade on its own. Let’s say you want to sell 100 shares of Stock X, so you log into your brokerage or stock trading app and enter an order to sell 100 shares. This can be a complex concept to understand, so here’s an example: This ensures that your order is actually processed properly and the correct trading info flows between broker, market maker, and the exchange. When you normally place a trade, your broker works with a clearing fim to route the order. In other words, it means your broker is getting paid to process your trades though a certain third party. Payment for order flow (PFOF) refers to a practice where a stock broker receives compensation for routing an order to a particular market maker.
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