PFOF — EU ban, US routing rules and execution costs

Payment for order flow is compensation for covered order-routing arrangements. It creates a conflict requiring scrutiny, but does not alone prove that the customer received a worse price. Distinguish US best-execution and disclosure obligations from EU MiFIR Article 39a.

What payment for order flow actually is

PFOF is compensation for directing covered customer orders to a particular firm or execution venue. It can create an incentive to favour the payer. The US framework includes cash or other compensation and rebates; the EU provision has its own definition and scope. A payment is not by itself proof that a particular client received an inferior fill, and no market-wide per-share rate is established here.

Zero dealing commission reveals one fee component, not the provider’s complete revenue model. It does not prove PFOF, a wider spread or a worse fill. Inspect other charges and execution evidence separately; the broker’s routing revenue cannot simply be added to the customer’s measured loss.

The conflict: best execution versus the highest payment

In the EU MiFID II and US FINRA examples, best execution concerns the firm’s conduct and available terms, including price, cost, quantity and execution likelihood. It is not a worldwide guarantee of the best visible price for every order. A payment that favours one route can conflict with those duties and requires examination.

A routing payment is an incentive to investigate, not a measured customer loss. Compare available price and quantity, order conditions, actual fills and execution-quality evidence; the result can include price improvement or disimprovement.

Why PFOF is legal in the United States

The US framework permits PFOF subject to applicable obligations. Rule 606 reports disclose covered routing and financial arrangements; public quarterly and customer-specific reports have different scopes. They are not a complete execution-quality report for each trade. Rule 605 supplies separate aggregate execution data for covered orders, which must be compared by consistent category and period.

FINRA’s June 2021 notice says receiving a routing payment alone does not establish a best-execution violation, but firms must not let it interfere with their duties. They must examine competing execution opportunities and relevant price improvement. Disclosure does not absolve a violation; neither the notice nor a report promises every order the lowest later-observed price.

Use the execution policy, routing reports and your own confirmations together. Price, quantity, order conditions and the available alternative at the same time matter. A later chart price or a historical controversy does not establish a current routing violation.

The EU ban after the transition period

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.

Article 39a MiFIR prohibits covered third-party fees, commissions and non-monetary benefits for executing or forwarding orders to a particular execution venue on behalf of retail and on-request professional clients. Limited domestic exemptions ended on 30 June 2026. The provision separately excludes specified approved/public venue-tariff rebates benefiting only the client, with no monetary benefit to the firm. It is not a ban on every third-party revenue stream. See MiFID II regulation in the forex market.

What it means for forex and CFD trading

Acting as a CFD counterparty, earning a spread and receiving an external order-routing payment are distinct mechanisms. A CFD contract can be bilateral while the provider separately manages or hedges its exposure. A market-maker label alone does not establish that every client loss becomes the firm’s profit or that the order follows a particular route.

A-book/B-book descriptions concern exposure management, not a certificate of execution quality. Check the actual contract, pricing, order policy and financing. Related reading: ECN broker compares with a market maker, spread versus commission at a broker and order execution time. “No PFOF” does not answer those separate questions.

Reconstruct the final expenditure from executed prices and separate fees without counting an already included spread again. That identifies cost; attributing a difference to PFOF requires additional routing and contemporaneous execution evidence.

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

This is a hypothetical cost comparison, not a record of lawful US routing. Buying 1,000 shares at USD 50.01 costs USD 10 more than buying them at USD 50.00 before charges. Whether the lower quote was accessible for the full quantity at that moment must be established separately.

With full simultaneous availability assumed, variant A buys 1,000 shares at USD 50.010 with no commission: USD 50,010. B buys at USD 50.000 plus USD 1 commission: USD 50,001, or USD 9 less. C buys at USD 49.995 with no commission: USD 49,995, or USD 6 less than B. Taxes, conversion and other costs are excluded. These hypothetical totals show why commission alone is insufficient, not that PFOF caused a difference or that a lawful US route necessarily had those choices.

What to do tomorrow

1. Read the entity’s effective documents. Check the tariff, routing policy and financial relationships. The words “inducement”, “rebate” or “third-party remuneration” alone do not establish prohibited PFOF under Article 39a; assess the covered arrangement and beneficiary.
2. Compare total cost. Zero dealing commission establishes neither zero total cost nor an automatically wider spread. Compare execution, separate charges and conversion costs for the same product.
3. Verify who actually supervises your broker. Find the name of the regulator and the licence number. For EU firms, Article 39a of MiFIR prohibits covered PFOF arrangements; domestic temporary exemptions expired on 30 June 2026. FCA-regulated UK firms are governed by separate UK inducement and best-execution rules, not EU membership. 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. Combine routing and execution evidence. Rule 606 reports identify routing arrangements. Execution-quality reports and your own fills provide different evidence about price and quantity; routing disclosure alone does not measure a PFOF cost.