Payment For Order Flow

You drive Uber. You know that a good way to get a big tip is to drive people from luxury hotels to the airport. However, you never get those kinds of clients. You've tried gaming the app, but whatever you do, you end up with lower-end dregs...like, driving drunk frat guys home from Jimmy McDougel's Wing and Whiskey Irish-Style Barroom Experience and Lounge.

So, instead of waiting for the app, you come up with a different plan. You'll tip the bellhops at the luxury hotels to steer clients to you. The clients will pay you cash instead of going through Uber...and you'll give the bellhops $5 for every rider they bring you.

That situation describes how payment for order flow works. Except, in this case, we're talking stock orders instead of rides from hotels.

You put in an order to your broker. They need to route the order through a third party (an exchange or market maker). They accept a kickback from a firm to steer the business to them. The broker makes money...not from you, but from the company it uses to complete your transaction.

The SEC requires that brokers disclose whether they receive revenue through payment for order flow.