PFOF (payment for order flow) — banned in the EU, legal in the US?

When a trading app advertises "zero commission", someone still pays for it — usually you, except it never shows up on your statement. The model that Robinhood made famous in the United States rests on a practice called payment for order flow: the fee a broker receives from a market maker in exchange for routing its clients' orders to that firm. In the United States it is legal and supervised by the SEC, while in the European Union the regulator ESMA treats it as broadly incompatible with the duty of best execution and is phasing it out by mid-2026. Below I explain why the same mechanism gets such different treatment on the two sides of the Atlantic.

What payment for order flow actually is

Payment for order flow, usually shortened to PFOF, is a fee that a retail broker receives from a third party — typically a specialised market maker — for directing its clients' orders to that firm. From the client's seat it looks innocent: you place an order to buy one hundred shares, the broker passes it on, the trade executes. The catch is that the broker is not choosing where to execute purely to give you the best price. It earns a fraction of a cent per share from the market maker that wants to capture the flow, because handling small retail orders can be more profitable for the maker than what it pays the broker to acquire them.

This revenue stream is exactly what allowed apps to advertise trading "with no commission". The client does not pay directly — the cost has been shifted into a structure in which the broker sells the client's order flow. It needs to be said plainly: "free" does not exist in financial markets. If you cannot see a commission, the cost sits somewhere else — in the spread, in a slightly worse execution price, or precisely in the sale of order flow. The mechanism is not fraud in itself, but it creates a tension that the retail client rarely notices.

The conflict: best execution versus the highest payment

The heart of the problem lies in a duty that binds every broker — the principle of best execution. A broker is meant to handle a client's order in the way that delivers the best possible result: the best price, a reasonable cost, and a high likelihood and speed of execution. PFOF introduces a second, conflicting incentive. If the broker is paid by whichever market maker offers the most for the flow, it has a reason to route orders where it earns the most, rather than where the client receives the best price.

In practice the difference is tiny on a single order — a few hundredths of a cent per share. But multiplied across millions of trades a day it turns into a real stream that flows from the small investor to the market maker and the broker. The client nominally trades "for free", yet hands over value in the form of a marginally worse price that they have no way to verify, because they cannot see where and how their order was executed. That is the conflict of interest regulators on both sides of the Atlantic keep arguing about.

"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, rather than the best possible outcome for its clients when executing their orders." — European Securities and Markets Authority (ESMA), public statement on payment for order flow, 2021.

Why PFOF is legal in the United States

In the United States, payment for order flow has been permitted for decades and remains legal under the oversight of the Securities and Exchange Commission (SEC). The regulator does not ban the practice — instead it requires disclosure. Rule 606 of Regulation NMS obliges brokers to publish quarterly reports on where they route client orders and what payment-for-order-flow arrangements they hold with each execution venue. The logic is that, if the investor can see in the report who pays the broker and for what, they can judge the execution quality and any conflict for themselves.

The US self-regulator FINRA adds a firmer condition. In a notice issued in June 2021 it reminded firms that merely receiving PFOF does not breach the duty of best execution — but that a broker "must not allow a payment or an inducement for order flow to interfere with its efforts to obtain best execution". In other words, the American model lets a firm take money for the flow, provided the client still receives a price no worse than they would get elsewhere, and provided the whole arrangement is documented.

This model became the subject of fierce controversy after the events of January 2021 around the shares of GameStop, when it emerged how large a share of "zero commission" app revenue came from PFOF, and how tightly it tied the broker's interest to the market makers. The debate over whether disclosure is enough, or whether an outright ban is needed, continues in the United States to this day.

Why the European Union is moving toward a ban

Europe chose the opposite road. As early as July 2021, ESMA issued a statement concluding that, in most cases, receiving PFOF is likely incompatible with the MiFID II directive — specifically with the obligations on best execution, conflict-of-interest management, the rules on inducements, and cost transparency. That was not yet a ban, but a clear signal to national supervisors to treat the practice as a priority in their oversight.

The full prohibition arrived with the review of the MiFIR regulation. The new rules introduce a general ban on receiving any payment for routing client orders for execution. Member states where PFOF already existed may temporarily exempt firms that serve domestic clients only — but that exemption is set to close, and the practice fully phased out by mid-2026. After that date a European retail broker will essentially be unable to earn money by selling order flow. The philosophy behind this decision is consistent with the whole European approach to retail protection, which I covered at greater length in the article on MiFID II regulation in the forex market.

What it means for forex and CFD trading

At a typical forex and CFD broker operating as a market maker, the mechanism looks different from an equity exchange, but the logic of "who profits from my order" is the same. Such a broker is often your counterparty itself — it takes the other side of the trade and earns on the spread, and on the fact that statistically most retail accounts lose. Classic exchange PFOF, the payment from an external market maker for the flow, matters less here, because the order frequently never leaves the broker's own book.

That is why, for a forex trader, the question that matters more than the term "PFOF" is whether the broker passes your order to the market (the A-book model) or keeps it in-house and trades against you (the B-book model). I broke those two models down in detail in the article on how an ECN broker compares with a market maker. Tied to this is the question of whether you pay for trading through the spread or through an explicit commission — two different ways a broker collects its cut, explained in the piece on spread versus commission at a broker. A third thread is the quality of execution itself: how fast and at what price the order actually fills, which I take up in the article on order execution time.

The conclusion is simple and uncomfortable: whatever the instrument, "zero commission" never means "free". The cost is always somewhere — in the spread, in the execution price, or in the sale of your order flow. Your job as a client is to work out which channel it flows through at your broker.

An illustrative example: what a "free" order really costs

Consider an illustrative example that shows the scale of the effect. Marek uses an app that advertises "no commission" trading and buys 1,000 shares quoted at 50 USD. The best available offer on the market is 50.00 USD, but the broker routes the order to a market maker that pays it for the flow and fills the trade at 50.01 USD. One cent per share looks like nothing — across a thousand shares it works out to 10 USD of difference. Marek paid no commission, so it feels as though he traded for free.

Yet had the same purchase been handled by a broker charging an explicit commission of, say, 1 USD per order but filling at 50.00 USD, Marek would have paid 1 USD rather than given up 10 USD in a worse price. The "free" model turned out to be ten times more expensive, except the cost was invisible. This is a simplified illustration — in the real world the gaps are usually smaller, and market makers often do offer some price improvement — but it captures why regulators look at PFOF with such suspicion. What matters is not whether you can see a commission, but the full price you actually pay.

What to do tomorrow

1. Check the footer and the terms to see how your broker earns. Go to the broker's site and find the section on costs and on its order execution policy. Look for the words "payment for order flow", "inducement", or "third-party remuneration". If the broker operates under EU oversight, that line should be gone after mid-2026 — and its presence today is a signal to ask questions.
2. Establish whether you pay through the spread or an explicit commission. Open your account's cost schedule and, for one typical trade, add up the total cost under both models. A broker advertising "zero commission" almost always takes its cut in a wider spread — compare it with the spread of a commission-based broker to see which model is cheaper for your style.
3. Verify who actually supervises your broker. Find the name of the regulator and the licence number. A broker under the FCA, CySEC, BaFin or another regulator from the European Economic Area is subject to the PFOF ban and the duty of best execution. A broker based outside the EU may use practices that European rules no longer allow. The broader walk-through on vetting a broker before you fund an account sits in the choosing a broker section on forexmechanics.com.
4. With a "zero commission" app, read the execution-quality report. If you use a US platform, look for its quarterly Rule 606 report — it shows where orders go and who pays for the flow. That is the only way to judge for yourself whether "free" trading is costing you more in a worse execution price than you would have paid in an explicit commission.