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Matt Levine

People Are Worried About Payment for Order Flow

Also GameStop, movies, stock lending and Papa John’s.

Okay let’s do payment for order flow again, because people are talking about it and that always stresses me out. Here’s an intuitive description of how it works.  A million people come to a broker to trade GameStop Corp. stock. Half of them want to buy shares, half of them want to sell shares. One share each, all using market orders, all at precisely the same time. The stock exchange has half a million shares of GameStop available for sale at $58.25, and orders to buy half a million shares for $58. The broker could send all of its customers’ orders to the stock exchange, where the buy orders would be filled at $58.25 and the sell orders would be filled at $58; the broker would pay the exchange a small fee for executing these orders.

But! The broker realizes, look, all these people who want to buy shares could be matched up with all these people who want to sell shares. I don’t have to pay a fee to the exchange, the buyers don’t have to pay $58.25, and the sellers don’t have to get $58. The buyers could pay $58.15 and save 10 cents, the sellers could get $58.10 and make an extra 10 cents, and I could keep 5 cents (and avoid the exchange’s fee) for my trouble. That’s a good deal for everyone!