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Payment for Order Flow: Why Your 'Free' Trades Aren't Actually Free

Beginner Investing • 6 min

What this lesson is about

Robinhood doesn't charge you a commission. Because Citadel and other firms pay Robinhood for the right to fill your order instead.

2 parts · a quick check after each · then the quiz

Part 1 of 2

Your "free" trades on Robinhood aren't free. Someone else is footing the bill, just not you. That someone is usually a market maker like Citadel Securities. They call it payment for order flow (PFOF).

Here’s how it goes. When you hit "buy" on a stock, Robinhood doesn’t send that order to the New York Stock Exchange. Instead, it sells the right to fill your order to a market maker. They pay Robinhood a small fee for each trade.

Insider Angle: Market makers profit from the tiny spread between what buyers pay and sellers receive. Retail orders like yours are especially appealing to them. You’re less likely than a hedge fund to have insider knowledge, making your order less risky and more profitable for them. So, "free" was never really free. It just shifted the cost somewhere less obvious.
The order bookResting orders on both sides. Big orders eat through them.

Quick check

A 'commission-free' broker routes your stock order to a market maker instead of a public exchange. Who pays the broker for that order?

Part 2 of 2

Try This: Look up your broker's Rule 606 order-routing disclosure. Every broker has one, usually linked in the footer. Check which market makers they route your orders to and what they get paid.

Quick check

What is the market maker's incentive for paying to receive your order instead of a large institution's order?

Quiz

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