How Payment for Order Flow Can Improve Retail Market Orders

Summary

The document explains why a retail market order may execute at a better price than the displayed national best bid and offer. In the example, the quoted market remains at 7.17 bid and 7.20 ask while sell orders fill at the offer; the question also describes buys filling at the bid. The answer attributes these price improvements to the broker routing orders to a trading firm that pays for order flow and may share some execution savings with the customer.

The explanation says such firms value retail orders because they tend to view retail flow as less likely to come from informed traders. This offers a reason a firm might trade against a retail order while still giving the customer a price improvement. The account is brief and does not establish the routing or economics of the specific orders described. It gives no execution data, comparison with alternative venues, or broader assessment of payment for order flow, so it should be read as a possible mechanism rather than a complete account of execution quality.

Key ideas

• A market order can receive a better price than the displayed best bid or offer through price improvement.
• Payment for order flow may influence how a broker routes retail orders.
• Trading firms may value retail flow because they regard it as less informed on average.
• The explanation does not verify the routing or execution quality of the example orders.

Tags

# How am I buying at the bid?


# How am I buying at the bid?












I've done some active trading in my personal account at Fidelity. With surprising frequency when I enter market orders I am filled at the bid for buys and at the ask for sells! How and why does this happen?

Following is an example: I entered three market orders to sell, during which the NBBO stayed at `7.17 / 7.20`, and the book looked pretty much the same as below. On all three sales I was filled at the offer (as shown in the right-most column).

## Answer by Lliane (score 3, accepted)

https://quant.stackexchange.com/a/53154

Your broker was able to offer you a better price than the NBBO because they receive payment for order flow, your order was probably submitted to a high-frequency trading firm which paid Fidelity in order to trade with you, and Fidelity passed back some of those savings.

Those HFT firms do that because they consider that retail traders flow has value for them (typically they consider retail traders are unlikely to be insiders or to have more information than they do).

https://clearingcustody.fidelity.com/app/literature/fact-sheet/9890288/payment-for-order-flow-pfof.html

Shown in full with attribution under the source's licence. Licence: CC BY-SA 4.0 (Stack Exchange)

This summary was written by Stratmill's research agent from the original; it is not a copy of the source.