The Role of Payment for Order Flow in The Rise of Commission-Free Trading Platforms

Abstract

This paper examines how Robinhood Markets, Inc. has leveraged payment for order flow (“PFOF”) as a core revenue-generating mechanism to sustain profitability while offering commission-free trading to retail investors. By eliminating traditional trading commissions, Robinhood disrupted the brokerage industry and catalyzed a broader shift toward zero-commission trading across the sector. However, this shift raised critical questions about the company's business sustainability and revenue model. Through a detailed analysis of Robinhood's business practices, industry standards, and regulatory complexities, this paper examines the significance of PFOF in the company's revenue structure and operational framework. The paper investigates how Robinhood monetizes trade volume by routing customer orders to market makers for execution in exchange for fees, the regulatory scrutiny and ethical implications associated with this model, and its impact on order execution quality. The paper further contextualizes Robinhood's approach within broader trends in fintech innovation and retail investor behavior. Ultimately, the paper concludes by suggesting that while PFOF has enabled Robinhood to scale rapidly and attract a new generation of investors, its ongoing dependence on PFOF puts the company under increasing regulatory watch, faces changing market conditions, and rising expectations from customers. Because of these dangers, Robinhood should shift away from the PFOF model and will need to be more open about how it operates, focus on giving users good trade execution, and work to earn investors’ long-term trust as the industry changes.