medium · Market Microstructure
A retail broker receives $0.20 per 100 shares in Payment for Order Flow (PFOF) from a wholesaler. The wholesaler executes a client's buy order at $45.01 when the exchange ask is $45.02.
Who are the primary beneficiaries and 'losers' in this specific microstructure arrangement?
- The wholesaler alone wins here, since internalizing the order lets it dodge all competing quotes.
- The retail client is the loser because the broker receives a kickback.
- Retail client and broker gain; institutional exchange liquidity providers lose 'cream-skimmed' flow.
- Everyone wins outright because this arrangement maximizes overall market efficiency.
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