[awinder]

Yes that is perfectly legal and happens, but I’ll try to be brief and explain why that wouldn’t happen usually and why it’s still a good thing. When you go to buy/sell a security you see a buy/sell price. Everything being discussed here pertains only to price improvement. That is, payment for order flow only happens if the offer is better than what you saw on the screen when you said buy/sell. When you go to sell/buy a security you’ll notice that there are different prices to buy or sell. Filling an order internally means that the difference in those 2 prices is entirely bore by your own customers, versus the ability to go to broader markets and improve outcomes for both of your customers.

Payment for order flow and internal clearing are 2 ways to execute out of a ton of options that a brokerage has. The specifics are seen as moats / “the secret sauce” for these firms so you’re not going to see anyone spill the specifics of how they get price improvement. But there is a ton of legislation & complexity around it for sure.