Jul. 28, 2025
Hi, When I see the argument that Payment for Order Flow (PFOF) brokers and wholesalers don't represent the interests of individual investors, I find myself in strong agreement. As an individual investor, I believe this sentiment perfectly captures the misalignment of incentives inherent in the PFOF model. Why PFOF Doesn't Align with Individual Investors PFOF is a practice where brokers receive compensation for directing customer orders to specific market makers (wholesalers) for execution. While proponents argue it leads to "free" commissions and better prices, I see several critical issues that directly conflict with my interests as an individual investor: * Conflict of Interest: The primary concern is the inherent conflict of interest. My broker, who should be working to get me the best possible execution for my trades, is instead incentivized to send my order to the market maker who pays them the most. This doesn't necessarily mean I'm getting the best price or fastest execution. * Lack of Transparency: The PFOF model often lacks transparency regarding how my orders are routed and the actual costs involved. It's difficult for me to ascertain if I'm truly receiving the best available price or if the "savings" from zero commissions are being offset by less optimal execution. * Suboptimal Execution: While market makers are required to execute orders at or better than the National Best Bid and Offer (NBBO), this doesn't guarantee the absolute best price. There can be price improvement opportunities that are missed, or my order might be intentionally slowed to benefit the market maker, a practice known as "latency arbitrage." Even a tiny fraction of a penny per share can add up significantly over many trades. * Erosion of Trust: Ultimately, the PFOF model erodes trust. I expect my broker to be an impartial agent in the market, working solely in my best interest. When I know they are being compensated by a third party for my order flow, it creates a lingering doubt about their loyalty. In conclusion, the idea that PFOF brokers and wholesalers do not represent my interests as an individual investor isn't just a claim; it's a fundamental concern about the integrity and fairness of the market structure. I believe true alignment of interests would involve a system where brokers are solely focused on achieving the best possible outcomes for their clients, free from the influence of payments from market makers. Speaking as an individual investor, I firmly believe this is a critical issue. Best regards, Jonatan