hard · Market Microstructure mmf-core
A retail broker internalizes a 1,000 share buy market order, providing 0.002 per share of 'price improvement' over the NBBO of 40.00 bid / 40.10 ask. The broker receives0.0015 per share in Payment for Order Flow (PFOF).
What is the effective price paid by the customer, and what is the 'cream-skimming' critique of this arrangement?
- $40.0985; the PFOF rebate the broker collects is legally required by SEC rule to be passed through fully to the end customer.
- $40.002; the broker is violating the Order Protection Rule by failing to route the order to the best displayed bid price.
- $40.1015; the customer pays more than the NBBO ask because of a hidden broker commission markup added.
- $40.098; the institutional liquidity on the exchange deteriorates because retail (uninformed) flow is removed.
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