How 'Free' Trading Makes Money
Robinhood charges you nothing and made $1.4B last year. You're not the customer, your orders are the product.
The walkthrough
When you hit Buy on a zero-commission app, your order usually never touches a public exchange like Nasdaq or the NYSE. Instead the broker *sells the right to fill your order* to a wholesaler, a high-speed market-making firm such as Citadel Securities or Virtu. That payment is called payment for order flow (PFOF), and for many brokers it is the single biggest revenue line.
Why your order is valuable. Retail orders are "uninformed", you're not a hedge fund with an edge, so the market maker can fill you and rarely get run over. Wholesalers fill you at or just inside the National Best Bid and Offer (NBBO), the best public price, pocketing a sliver of the bid-ask spread plus tiny price moves across millions of orders. That sliver is the profit they share back with your broker as PFOF.
The flow, step by step. Your tap goes to the broker, the broker *routes* it to the wholesaler it has a deal with, the wholesaler internalises the trade (fills it from its own inventory) and reports it to a public tape, then sends a small per-share payment back to the broker. You see "filled" in milliseconds and never know a public exchange was bypassed.
The catch is "best execution." Brokers are legally required to seek best execution for you, and wholesalers advertise price improvement (filling you slightly better than the NBBO). Critics, and a 2020 SEC settlement that fined Robinhood $65 million, argue the conflict is real: a broker routing to whoever pays *it* the most isn't obviously routing to whoever fills *you* the best.
Why it matters and where it's banned. PFOF is why "free" trading exists, but the cost is hidden in the *quality of your fill*, not a visible commission. The UK and the EU (from 2026) ban PFOF outright; the US SEC has debated reforms like order-by-order auctions. The lesson: when a financial product is free, look for who's paying, here, it's a market maker buying the privilege of trading against you.
The rail map
Where your "free" order really goes
- 1You tap Buy
Order leaves your phone, you pay $0 commission and assume it hits "the market".
- 2Broker routes
The broker sends your order to a wholesaler it has a PFOF agreement with, not to a public exchange.
- 3Wholesaler fillshighest cost / risk
Citadel/Virtu internalise the trade from their own inventory at or inside the NBBO.
- 4Spread capturewhere value leaks
The market maker earns a sliver of the bid-ask spread across millions of retail orders.
- 5PFOF kickbackwhere value leaks
A per-share payment flows back to your broker, its main revenue from "free" trading.
- 6Trade reported
The fill prints to the public tape; you see "filled" and never learn an exchange was skipped.
Glossary
Payment for order flow (PFOF)
A payment a market maker gives a broker in exchange for routing customer orders to it.
Wholesaler / market maker
A firm like Citadel Securities or Virtu that fills retail orders from its own inventory rather than on an exchange.
NBBO
National Best Bid and Offer, the best publicly quoted buy and sell price across all US exchanges at that instant.
Bid-ask spread
The gap between the highest price buyers offer and the lowest sellers accept; the market maker earns a piece of it.
Price improvement
Filling an order slightly better than the NBBO, wholesalers cite it to argue retail still benefits.
Best execution
A broker's legal duty to seek the most favourable terms reasonably available for a customer's order.
Check yourself
1.On a "free" trading app, where does your buy order most often get filled?
2.Why are retail orders especially valuable to a market maker?
3.What is the core conflict of interest regulators worry about with PFOF?
4.How does a wholesaler actually make money after paying the broker PFOF?
5.Which statement about PFOF regulation is correct?