![]() ![]() Q2: Can you explain what payment for order flow is and its relationship to the zero-dollar transaction costs online traders enjoy? A: Brokerage firms involved in payment for order flow receive money from third-party institutions in exchange for directing clients’ orders to the paying firm’s trading desk. They have stopped charging for online trades in favor of covering their execution costs with other forms of revenue, such as payment for order flow. ![]() While most industry participants have passed their cost savings from higher operating efficiencies along in the form of reduced commissions, some have gone farther. Q1: With some brokers now offering $0 commission trading fees, is there no longer a cost to trading? A: Despite the well-advertised fall in brokerage commission rates, the cost of executing online trades has not fallen to zero for the broker-dealers who execute these trades, nor in our opinion for the clients who pay $0 on their trades. Thornton, CPWA® Senior Vice President and National Director of Brokerage at Northern Trust Securities, Inc. Concurrent with the technological gains and shorter settlement process has been a rise in the use of payment for order flow at a number of brokerage firms.įor a clearer understanding of how payment for order flow impacts a broker-dealer’s cost structure, and prompt more frequent trading, we recently spoke with Mitchell B. But not all the cost benefits investors are experiencing may be the result of improved operating efficiency. User-friendly technology and the resulting lower transaction costs have helped fuel the recent increase in direct participation by retail investors in the stock market.
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