Brokers like Trade Republic and DEGIRO offer incredibly low fees. Some trades are even free. But running a brokerage isn't free, so how do they make money?
For many of them, the answer is payment for order flow (PFOF). It's a practice that's been quietly shaping how your trades are handled, and it's controversial enough that the EU has decided to ban it.
This article explains what PFOF is, why it's controversial, and what the EU's upcoming ban means for you.
What is payment for order flow?
Payment for order flow, or PFOF, is a way for brokers to make money.
When you invest in the stock market, two main players are involved:
- Brokers like Trade Republic or DEGIRO. They execute trades for you.
- Market makers like Tradegate. They constantly buy and sell shares to keep the market running smoothly.
When you place an order through your broker, your order does not always go directly to a traditional stock exchange. Instead, the broker may send it to a market maker. The market maker then executes the trade for you.
In many cases, brokers choose the venue that gives you the best available price. But under the PFOF model, the market maker pays the broker for sending orders their way. That payment is called “payment for order flow”.
Why would a market maker pay for your trade?
A market maker earns money from the bid ask spread. This is the small difference between the price at which they are willing to buy a share and the price at which they are willing to sell it. They buy slightly cheaper and sell slightly higher. That small gap is their profit. But this only works well if the person trading with them does not have better information.
Market makers prefer trading with retail investors like you rather than highly sophisticated high frequency trading firms. Professional firms are faster and often better informed. That makes them harder to profit from. So from the market maker’s point of view, retail investors are more predictable.
A another way to think about it is insurance. If an insurance company could choose only healthy customers, it would make more money per customer. Because of that, it could afford to pay a referral fee to whoever sends those customers its way.
PFOF works in a similar way. The market maker sees retail investors as “good risk”. So they are willing to pay the broker a referral fee to receive those trades. That referral fee is the payment for order flow.
How PFOF benefits investors
This practice can lead to lower commission fees for investors. Since brokers receive payments from market makers, they might not charge you a commission for trades. This is visible in the table below, which shows the transaction fee for buying €1,000 of the IWDA ETF. Trade Republic and DEGIRO, two brokers that adopted the PFOF model, are among the cheapest:
Why it can also harm investors
While it can lead to lower costs, PFOF is controversial. It creates a conflict of interest for brokers and might result in worse execution prices for investors. After all, the broker will route the trades to the market maker that pays them the highest fee, rather than the one that will offer you the best price (which the lowest price when buying a stock and the highest when selling).
The Dutch regulator AFM researched the price of Dutch stocks for PFOF and non-PFOF brokers and found that PFOF leads to worse prices in most cases:
The analyses found that the majority of retail client transactions on the two PFOF trading venues were executed at prices worse than transactions on the reference trading venues. On the non-PFOF trading venue, most of the retail client transactions have similar execution prices when compared to the reference trading venues.
The CNMV, the Spanish regulator, came to a similar conclusion for Spanish stocks:
It shows that for the trades executed on behalf of the PFOF broker’s clients through the PFOF TV on Spanish stocks during the first half of 2021, best execution was seldom achieved (only a 3.3% of the trades) and in most cases (86%) the prices obtained by clients were worse than the worse alternative in the group of comparable trading venues. The average price deterioration is estimated at €1.09 per €1,000 traded.
There's also a concern about transparency and whether investors fully understand how their trades are being handled.
It's banned in the EU from 30 June 2026
Because of the controversy around payment for order flow, the European Union has decided to ban the practice from 30 June 2026 onwards. This means brokers in the EU will no longer be allowed to receive compensation for sending your orders to specific market makers.
Temporary exemption for Germany
There is one exception. Member states where payment for order flow was already allowed can grant a temporary exemption to investment firms under their supervision. But this exemption only applies to clients who live in that same member state, and only until 30 June 2026.
In practice, this means Trade Republic can continue earning money through payment for order flow from its German clients until June 2026. However, it cannot do so for Belgian clients, for example.
Which brokers earn revenue through payment for order flow?
The following brokers are known to have adopted the PFOF model:
- DEGIRO through the Tradegate exchange
- Trade Republic through the Lang und Schwarz exchange
- Scalable Capital through the gettex exchange
eToro applies PFOF for its American clients, where it's legal. But it's unclear if they also do it for their European clients.
Conclusion
Payment for order flow is a clever way for brokers to offer you lower fees. But as the research from regulators in the Netherlands and Spain shows, those savings can come at a hidden cost: worse prices when your trades are executed.
The EU's decision to ban PFOF from June 2026 will change how brokers like DEGIRO and Trade Republic make money. It's still unclear exactly how they will adapt their pricing.
For now, the most important thing is to understand what you are paying for when you invest. Low or zero commissions can be attractive, but they are rarely the full picture. Always look at the total cost of investing, including the quality of trade execution.