Which brokerage houses do NOT engage in payment for order flow (PFOF) (2024)

Looking to buy an individual stock just for fun.

I have my Roth IRA is a Vanguard in a small taxable account with them, but I don’t like that Vanguard engages in payment for order flow with companies such as citadel, in order to afford offering commission-free trading.

A lot of other popular brokerage firms such as TD Ameritrade also engage in payment for order flow. The problem with payment for order flow is that there is no such thing as a free lunch. The party paying for the privilege of placing a stock trade on your behalf is getting a lot of information in advance for front running.

Yes, I know the front running is an illegal practice, but as zero hedge is pointed out in the past, citadel has paid fines to the SEC for engaging in front running on payment for order flow trade that they do with Robin Hood etc. citadel notably sent some threatening legal letters to Zerohedge because the publication implied that citadel engages for payment in order flow and zero hedge responded by showing them copies of settlements they made with the SEC as fines for doing that. (So don’t tell me that Citadel doesn’t engage in front running )

I see that Fidelity notably offers commission free trading, but apparently does not engage in payment for order flow. Not sure how Fidelity can afford this unless they are choosing to eat that as a loss for the sake of gaining a customer’s business down the road.

If I want to buy an individual stock and not deal with payment for order flow, is Fidelity an easy choice to go with? Or are there other brokerage firms I can use that charge a commission to place a trade?

Thanks!

Merrill does not accept payment for order flow routed to third‑party market makers. Market makers compete for our order flow.

https://www.merrilledge.com/investing/b ... on-trading

index2max wrote: ↑Fri Jan 28, 2022 9:26 amLooking to buy an individual stock just for fun.

I have my Roth IRA is a Vanguard in a small taxable account with them, but I don’t like that Vanguard engages in payment for order flow with companies such as citadel, in order to afford offering commission-free trading.

See Also

Here's Why Citadel's Customers Are About to Lose EverythingBloomberg - Are you a robot?How Bloomberg's Beloved Citadel Securities Manipulates the MarketCitadel Securities - Next-Generation Capital Markets Firm

A lot of other popular brokerage firms such as TD Ameritrade also engage in payment for order flow. The problem with payment for order flow is that there is no such thing as a free lunch. The party paying for the privilege of placing a stock trade on your behalf is getting a lot of information in advance for front running.

Yes, I know the front running is an illegal practice, but as zero hedge is pointed out in the past, citadel has paid fines to the SEC for engaging in front running on payment for order flow trade that they do with Robin Hood etc. citadel notably sent some threatening legal letters to Zerohedge because the publication implied that citadel engages for payment in order flow and zero hedge responded by showing them copies of settlements they made with the SEC as fines for doing that. (So don’t tell me that Citadel doesn’t engage in front running )

I see that Fidelity notably offers commission free trading, but apparently does not engage in payment for order flow. Not sure how Fidelity can afford this unless they are choosing to eat that as a loss for the sake of gaining a customer’s business down the road.

If I want to buy an individual stock and not deal with payment for order flow, is Fidelity an easy choice to go with? Or are there other brokerage firms I can use that charge a commission to place a trade?

Thanks!

I don't know of a retail brokerage that doesn't accept payment for order flow, but I think that this is not correct:

The problem with payment for order flow is that there is no such thing as a free lunch. The party paying for the privilege of placing a stock trade on your behalf is getting a lot of information in advance for front running.

There is no free lunch, but the 3rd party isn't paying to front run you. The 3rd party is paying to trade with you as a retail investor because the 3rd party knows that (statistically) you don't have an informational advantage over them. For the 3rd party to trade with a hedge fund is dangerous ... the hedge fund might actually know something. Retail investors ... no (on average).

So ... unless you REALLY care about this on principle, then I'd suggest just picking the most convenient retail broker and getting on with your trading. It won't matter.

Alternately, I'd try to find retail brokers that charged large fees and then see if they charged 3rd parties for visibility into their order flow.

Interactive allows you to specify where you want the order routed.

I believe Fidelity does not do PFOF.

Why do you think it matters which brokerages pay for order flow, and which don't?

First, you are protected by Reg NMS, which will ensure that you will get the price inside of bid/ask spread.

Second, the vast majority of internalizers have "Best-Ex" (or best execution) "promise".
I hesitate to say this is a requirement or a mandate, but rather a promise.

Say, if you trade with Fido, and they route to Cit MM, then you likely get your market order executed at more or less quarter spread.

However, you need to make sure to send an "eligible" order.

For example, special order types are not eligible.
And block orders are not eligible either.

If you send a block order, likely, your execution cost will be higher.

You can google [broker name] rule 606 disclosure and see who the broker routes orders through.

For example, someone posted Merrill Edge as not doing PFOF.

Merrill's Rule 606 disclosure says all orders go through BOFA Securities. Per the 2021 Q4 report, Merrill generally pays for market orders but gets paid for non-marketable limit orders.

https://www.ml.com/legal.html

BOFA Securities Rule 606 disclosures for 2020 and later curiously doesn't list anything for stocks... But for options it lists the various exchanges. For 2019 and earlier they list the exchanges for stocks though. My guess is that BOFA's 606 reporting has an error or something.

PluckyDucky wrote: ↑Fri Jan 28, 2022 10:39 amYou can google [broker name] rule 606 disclosure and see who the broker routes orders through.

For example, someone posted Merrill Edge as not doing PFOF.

Merrill's Rule 606 disclosure says all orders go through BOFA Securities. Per the 2021 Q4 report, Merrill generally pays for market orders but gets paid for non-marketable limit orders.

https://www.ml.com/legal.html

BOFA Securities Rule 606 disclosures for 2020 and later curiously doesn't list anything for stocks... But for options it lists the various exchanges. For 2019 and earlier they list the exchanges for stocks though. My guess is that BOFA's 606 reporting has an error or something.

Yes and there is definitely a difference when your broker pays for order flow instead of getting paid for order flow.

Fidelity doesn’t take PFOF for regular trades but they do for options.

Fidelity allows you to direct your trade to a particular exchange if you want to avoid Citadel. There is no guarantee your order will execute on your chosen exchange. If the exchange you choose- meme stock investors like IEX- cannot meet NBBO, the order, even a market order, will cancel.

lazynovice wrote: ↑Fri Jan 28, 2022 11:05 amFidelity doesn’t take PFOF for regular trades but they do for options.

Fidelity allows you to direct your trade to a particular exchange if you want to avoid Citadel. There is no guarantee your order will execute on your chosen exchange. If the exchange you choose- meme stock investors like IEX- cannot meet NBBO, the order, even a market order, will cancel.

I guess I’m going to have to find some sort of in-depth written source that explains the gory details on how stock market trades are routed so I can figure out which approach makes the most sense for buying stocks and ETFs without shenanigans. I would rather pay a commission upfront then find out that I was getting a “free lunch“ and being disappointed later after understanding the consequences of it.

Any thorough written sources you could point me to that explain these things? I just invest in index funds for retirement accounts but when it comes to taxable, it is such a minuscule part of my portfolio currently that I don’t mind buying individual stocks with it just for fun

index2max wrote: ↑Fri Jan 28, 2022 11:30 am

lazynovice wrote: ↑Fri Jan 28, 2022 11:05 amFidelity doesn’t take PFOF for regular trades but they do for options.

Fidelity allows you to direct your trade to a particular exchange if you want to avoid Citadel. There is no guarantee your order will execute on your chosen exchange. If the exchange you choose- meme stock investors like IEX- cannot meet NBBO, the order, even a market order, will cancel.

I guess I’m going to have to find some sort of in-depth written source that explains the gory details on how stock market trades are routed so I can figure out which approach makes the most sense for buying stocks and ETFs without shenanigans. I would rather pay a commission upfront then find out that I was getting a “free lunch“ and being disappointed later after understanding the consequences of it.

Any thorough written sources you could point me to that explain these things? I just invest in index funds for retirement accounts but when it comes to taxable, it is such a minuscule part of my portfolio currently that I don’t mind buying individual stocks with it just for fun

I’d start here and then go to other sources. Honestly, if it is more than a few pennies, I’d be surprised.
https://www.fidelity.com/trading/execut ... y/overview
https://www.fidelity.com/products/atbt/ ... _Help.html

Interactive Brokers founder speaks out on this topic a lot.. he estimate payment for order flow has hidden cost of about $4 to $6 in poor execution quality per retail trade.

Below is a good podcast with him that worth a listen.. relevant topic start about 34 minute or so..

https://open.spotify.com/embed-podcast/ ... ggH5e4ayFw