While the course of most trades is extremely
smooth, some industry practices may be seen as better for the
firms than for their clients.
For example, to attract business, market
makers and regional exchanges may offer payment for order flow.
That means they will pay a fixed amount — say one cent per
share, though it could be more or less — for each order a
brokerage firm routes to them for execution.
Critics question the practice, suggesting
that the profit the firm might realize from the payment may weigh
too heavily in a broker's routing decision. Advocates believe
payment for order flow fosters healthy competition by attracting
business away from the dominant players.
The Securities and Exchange Commission (SEC)
permits this practice but requires all brokerage firms to report
quarterly whether they have payment for order flow arrangements
with the market centers where they send a significant percentage
of their trades. And if you ask, your broker must tell you where
your orders were routed during the previous six months.
