Payment for order flow: how commission-free brokers actually make money

Three parties are involved.

1. 1You place a market order for 100 shares.
2. 2Your broker does not send it to the primary lit exchange (Xetra, Euronext, the LSE). It sends it to a quote-driven venue where a single designated market maker quotes both sides of the book — historically Lang & Schwarz TradeCenter on LS Exchange, Baader Bank on gettex, Tradegate AG on Tradegate.
3. 3The market maker fills you at its quoted price and keeps the difference between what it pays sellers and charges buyers. Out of that spread capture it pays the broker a rebate.

Retail order flow is worth paying for because it is uninformed. A retail buy is unlikely to be followed by an institutional wave that moves the price against the market maker. Filling a thousand small retail orders is far more profitable per share than quoting to a hedge fund. So market makers compete hard for the flow — but they compete by bidding for the broker's business, not by improving your price.

That is exactly the conflict ESMA put on record in its statement of July 2021: PFOF "causes a clear conflict of interest between the firm and its clients, because it incentivises the firm to choose the third party offering the highest payment".

Two national regulators measured this properly, using their own MiFID II transaction reports rather than broker marketing material. Both compared every PFOF-venue fill against every trade in the same instrument in the same second on the ten most liquid reference venues.

The Dutch AFM's February 2022 study covered Dutch shares over the first half of 2021:

Spain's CNMV repeated the exercise in a March 2022 working paper covering 4,676 fills in 50 Spanish shares: 86.4% fell into the "worse execution" bucket with a 0.14% price deterioration, 10.2% were similar, and only 3.3% were better. The volume-weighted average was −0.11%, which the CNMV translates into roughly EUR 1.09 of extra cost per EUR 1,000 traded.

Note how conservative that test is. A fill only counts as "worse" if its price was worse than the worst price available anywhere in the reference group in that same second. Measured against the average instead, both regulators say the numbers would look materially uglier.

Worked example 1 — the same order, two routes

You buy EUR 20,000 of shares.

• Via the AFM's PFOF venue Y: an 11.5 basis point disadvantage = 0.00115 × 20,000 = EUR 23.00, invisible because it sits inside the price.
• Via a lit exchange with an explicit EUR 4.90 commission: EUR 4.90, printed on the contract note.

The "free" route is EUR 18.10 more expensive. Your contract note still says EUR 0.00.

Worked example 2 — where the break-even sits

The threshold is easy to compute: explicit fee ÷ spread disadvantage.

• At the worse venue (11.5 bp): 4.90 ÷ 0.00115 = about EUR 4,260.
• At the milder venue (4.80 bp): 4.90 ÷ 0.00048 = about EUR 10,200.

Below those order sizes the commission-free route genuinely wins; above them it does not. Concretely:

• A EUR 150 monthly savings-plan purchase: 11.5 bp = EUR 0.17. Commission-free saves EUR 4.73 every month.
• A EUR 25,000 rebalance: 11.5 bp = EUR 28.75, against EUR 4.90 on a lit venue. Commission-free costs EUR 23.85 more.

That is the honest version of the story. For savings-plan investors, PFOF really was the cheaper route. For anyone placing large single orders, it was not.

The US is why this topic is so visible. Under SEC Rule 606, brokers must publish quarterly reports showing where orders were routed and what they were paid for routing them; Rule 605 requires execution-quality statistics and was overhauled in 2024. The SEC's proposed Order Competition Rule of December 2022 — which would have forced most marketable retail orders into brief auctions before a wholesaler could fill them — was never adopted and was subsequently withdrawn.

The most widely cited magnitudes are now a few years old but still illustrative: around USD 2.5bn of PFOF flowed to US brokers in 2020; in 2021 the twelve largest US brokerages together took in roughly USD 3.8bn, and Robinhood's transaction-based revenues were about USD 1.4bn, some 77% of its net revenue. Three wholesalers handled over 80% of retail equity orders.

Why does the same practice behave differently there? Because the market structure differs. The US has a binding National Best Bid and Offer and an order-protection rule; wholesalers routinely fill retail orders inside that spread, and the price improvement is measurable. Europe, over the period studied, had neither a consolidated tape nor an equivalent protection rule — the reference price you would measure against simply did not exist for a retail investor. That is why Europe reached a different conclusion from the US on the same practice.

Two things, and only one of them is unambiguously better for you.

First, small explicit fees. Trade Republic's own pricing schedule lists EUR 1.00 of external cost per order on its default route and EUR 2.00 if you pick the venue yourself. That is progress: EUR 1.00 on the contract note is more honest than EUR 0.00 plus EUR 3.46 hidden in the price.

Second, broker-operated venues. Several neobrokers now have an ownership interest in the venue they route to — Scalable Capital, for instance, via the European Investor Exchange. The rebate has gone; the conflict has not. The broker is both the gateway and the venue, and earns on both sides. The ban targets the payment, not the structure.

So keep asking: which venue does my order go to by default, who quotes prices there, and what is the broker's ownership relationship with that venue?

The interest margin is routinely underestimated. A simple illustration: if EUR 3,000 sits permanently as cash in your account and the broker earns 2% on it at the money market while passing on nothing, that is EUR 60 a year from a single account. For a small portfolio that dwarfs anything your orders generate in fees. Scrutinise the cash interest rate as carefully as the order fee — and do not park more cash at a broker than you need to.

The same goes for foreign exchange. A 1.5% conversion markup on a EUR 5,000 order costs EUR 75; the same conversion at 0.25% costs EUR 12.50. On international shares that is almost always the larger line item, well ahead of the commission.

1. 1Take the timestamp and fill price from the contract note — the settlement document, not the app's summary screen.
2. 2Compare that price with prints on the primary exchange in the same minute. Free time-and-sales data from the home exchange is enough.
3. 3Read your broker's order execution policy. It has to state which venues are used by default and on what criteria.
4. 4Repeat this for three to five larger orders. One data point tells you nothing; a pattern tells you plenty.

1. 1Split by order size. Small, regular purchases on the cheap default route. Large single orders on a lit exchange with an explicit commission, even at EUR 4 to EUR 10 a go.
2. 2Trade during core hours. Outside the home exchange's session a single market maker sets the price with no real competition, and the quoted spread widens accordingly.
3. 3Use limit orders. A limit is the one protection entirely within your control, whoever operates the venue.
4. 4Check the cash interest rate and the FX markup before you compare order fees. For most portfolios those are the bigger numbers.
5. 5Ask your broker in writing which venue your orders are routed to and whether it holds a stake in that venue. It is obliged to tell you.

This article is information, not investment advice.