You are literally required to get better fill prices than the market with PFOF. You aren't being played any more than if you just send a normal limit order to the market
Why—exactly—do you reason that someone is willing to pay $109 per user per year for their order flow?
Put another way, Robinhood’s actual customers are confident that they are able to extract in excess of $109 in value each year they purchase the flow of orders from a given Robinhood user. From where and/or from whom do you suppose this money is being extracted?
Robinhood users are unsophisticated (= to put it another way: "idiots" who don't have advanced data to inform their trades). This means taking the other side of their transactions is more likely to be profitable than taking the other side of orders coming from, for example, RenTech. Knowing that an order comes from RH (or in other words, not from sophisticated traders) means it's more likely to be profitable for the market maker to fill it. This difference in EV is worth more than $109 to the customers.
It's essentially a "first dibs" approach to fulfilling a transaction. By law it's required to fill at the best price available, so there's no difference in price, and it may even fill quicker if it's in between the bid/asks because of the reason explained above.
a lot of people have given very thorough explanations of why pfof is not an evil thing in this thread. i suppose you're free to believe your own narrative, if you want.
My only point is that the narrative of Robinhood is completely backwards. Far from the “stealing from the rich to give to the poor” backstory from which the name comes from, all they’ve done is encourage hordes of unsuspecting sheep to venture deep into the wolves’ den.
PFOF may not be evil, but Robinhood certainly is. The fact that their customers’ orders are of such high value makes it abundantly clear who the moneyed players think losers at the table are. Anyone paying attention understands that Robinhood’s product is a continuous flow of suckers to their paying customers. Trading on Robinhood is an implicit bet with apparently quite poor odds that you’re not one of those suckers.
That doesn’t mean you’re better off trading on some other platform. It means they're goading you into playing the wrong game in which entities with billions at stake are so convinced you will lose they’re happy to pay for the privilege of sitting down at the table with you. The real lesson is that you should be playing a different game than the one Robinhood is promoting.
There may be opportunity to build a Robin Hood competitor by transparently passing the PFOF fees through to users, rather than pocketing them (as Robin Hood does). Imagine if you paid a monthly $5 subscription to be a member of a broker, and then had unlimited free executions, with the PFOF fees being clearly shown, and credited to your account.
I understand that Robinhood sells order flow and that you may get a worse fill because of it, but is the average Robinhood user getting 3 cents of slippage on their order of 1 share of Ford worse than a $10 round trip in order fees from a more premium broker on the same trade?
I think the order flow model is better for most retail traders. Obviously, if you're buying $20k in stock at a time, paying the fees will be better, but that's not your average Robinhood user.
The higher-level argument might be that if PFOF didn't exist, NBBO might be better. If Citadel et al wanted to make markets they'd have to publish their prices.
(Of course, that gets rid of the "market segmentation" signals, so it'd probably make life a little better for institutions and make life a little worse for individuals, on net. No doubt smart people could disagree about how much of each effect there would be.)