Order Routing and Payment for Order Flow
An order does not go to an exchange because you sent it there. It goes wherever your broker routes it, and the routing decision has a disclosed economics behind it.
MadStockAlerts Research · Updated August 29, 2026
What to take away
- Most retail orders are routed to wholesalers rather than to an exchange.
- Payment for order flow is the wholesaler paying the broker for that stream.
- Brokers owe a best execution obligation, which is about more than price alone.
- Rule 606 reports disclose where orders were routed and what was received.
- Price improvement is real and is measured against the NBBO at the moment of routing.
MAD Academy Training Video · 0:46
Who Pays for Your Free Trade
Payment for order flow means a firm pays your broker to handle your order, which is where the revenue from commission-free trading comes from.
This lesson is part of a Stock Alerts + Tools plan.
What actually happens to an order
- 1You submit an orderIt reaches your broker, which is not an exchange.
- 2The broker's routing logic runsIt decides where to send the order, based on its arrangements, the order's characteristics and its execution obligations.
- 3It usually goes to a wholesalerA market-making firm that internalises retail flow, filling it from its own book rather than sending it to an exchange.
- 4The fill comes backFrequently at a price slightly better than the prevailing quote, which is what price improvement means.
The wholesaler is willing to do this because retail order flow is, in aggregate, less informed than the flow arriving at an exchange. Filling it is a lower-risk business than quoting into a market where the counterparty may know something, and that difference is where the economics come from.
- 1You submit an order
- 2Your broker's routing logicWhich is not an exchange, and has arrangements
- 3A wholesalerFills it from its own book, frequently at a price better than the quote
- 4The fill returnsAnd the payment for the flow goes to the broker
The payment, and the argument about it
Payment for order flow is a per-share or per-contract payment from the wholesaler to the broker in exchange for routing the order stream. It is legal, disclosed, and the subject of a long-running argument that both sides of are worth stating.
| The case for | The case against |
|---|---|
| It funds commission-free trading | The cost is moved rather than removed |
| Retail orders often receive price improvement over the quote | Improvement is measured against a quote that may itself be affected by internalisation |
| Fills are fast and certain | The broker's routing incentive is not aligned with the client's |
| It is disclosed under Rule 606 | Few clients read the disclosures |
The honest summary is that the practice is disclosed, that measured price improvement on retail-sized orders is real, and that a conflict of interest exists in the routing decision regardless. All three are true simultaneously.
Best execution is not just price
Brokers owe a duty of best execution, which is a regular and rigorous review obligation rather than a guarantee on any single order. It covers several factors, and price is one of them.
- The price obtained, measured against the prevailing quote.
- Speed of execution, which matters most in fast markets.
- Likelihood of execution, particularly for larger or less liquid orders.
- The size available at the quoted price.
- The overall cost, including any fees passed through.
Because the obligation is assessed across order flow over time rather than trade by trade, a single fill that looks poor is not itself a breach, and a broker satisfying the duty is running a review process rather than promising an outcome.
The disclosures that exist
Two rules produce public information about routing, and both are available without asking.
| Rule | What it produces |
|---|---|
| Rule 606 | A quarterly report from the broker on where orders were routed and the payments received |
| Rule 605 | Execution quality statistics from market centres, including price improvement and speed |
A Rule 606 report answers the question directly: which venues received your broker's orders, in what proportions, and what it was paid per hundred shares. It is a public document and it is the only place the arrangement is quantified.
Where the exchanges make their money
Exchanges also pay for order flow, through a different mechanism. Under the maker-taker model, an exchange pays a rebate to an order that adds liquidity to its book and charges a fee to an order that removes it.
| Order | Effect on the book | Typical treatment |
|---|---|---|
| A resting limit order that gets filled | Added liquidity | Receives a rebate |
| A marketable order that takes the quote | Removed liquidity | Pays a fee |
| Inverted venues | The reverse | Pay the taker and charge the maker |
The rebates are fractions of a cent per share and are large enough at institutional volumes to influence where orders are routed. That creates a second routing incentive alongside payment for order flow, operating on a different set of orders.
For a retail order of ordinary size the effect is not directly visible, and it is one of the reasons the routing tables in a Rule 606 report list venues that a retail customer has never heard of. The report states the economics for each.