Payment for order flow is an indispensable tool in the democratization of markets. Coupled with the ability to buy and sell fractional shares of companies, the practice has made stock investing available to everyone. But it’s under assault, undeservedly so, and needs support.
For those unfamiliar, payment for order flow is the reason trading apps such as Robinhood Markets Inc. and discount brokers like Charles Schwab Corp. can charge zero commissions for trades on stocks and exchange-traded funds. When an investor buys or sells a stock or ETF, the broker typically sends the order to a market maker such as Citadel Securities to execute the trade. In exchange for that order flow, the market maker kicks back a portion of its fee to the broker, thus eliminating the need for the broker to charge a commission.