Interactive Brokers running anti-PFOF TV ads

US based online broker Interactive Brokers (NASDAQ:IBKR) has been running a series of television ads, touting its lack of use of payment-for-order-flow (PFOF) in handling client orders. The ads seem to be a response to Robinhood (NASDAQ:HOOD), which burst onto the scene in recent years and has taken a lot of business away from “traditional” online brokers with its commission-free trading model.

Robinhood can offer commission-free trading, of course, because it makes its money (primarily) from selling client orders to third party market making firms – or payment-for-order-flow. The market makers trade with the orders by taking the other side of the trade, thus establishing an execution price.

Since according to IBKR most retail brokers sell their orders to market makers, nearly 50% of orders are executed away from the exchanges. As a result, liquidity at the exchanges has diminished and it is likely that the NBBO (i.e. national best bid / offer) is now wider than it would be if all orders went to the exchanges. So although market makers do give a slight improvement over the NBBO, if they did not divert orders from the exchanges it is likely the NBBO would be narrower.

By contrast, professional/institutional traders do not want to show their orders at the exchanges for fear of driving the price away from themselves. Instead, they prefer to route these orders into Dark Pools. When brokers who do not sell their orders (but want to execute them at the best possible price), send the orders into dark pools, they often get an execution well inside, often even in the middle of, the NBBO.

IBKR is not the only firm trying to sell both regulators in the US (payment-for-order-flow is already banned in many other jurisdictions including Canada, the EU, the UK, and Australia) as well as retail clients that they are better off avoiding PFOF firms. We recently reported that another Robinhood neobroker competitor,, recently came out with trade execution data showing that it delivers better execution quality on average to customers than peer firms that accept PFOF from market makers.

The latest IBKR ad regarding PFOF follows:

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