[masonium]

PFOF does not tighten "lit" spreads.

PFOF does offer price improvement, which can effectively decrease the spread *for a particular marketable order". However, PFOF drives volume away from the limit markets, which determine the actual spread by which price improvement is measured against. So, it's a bit of a shell game.

Concretely, at least 20% of all stock market volume is internalized in PFOF-style firms (citadel, virtu, et. al). If that volume were all on the lit exchanges instead, the spread on those exchanges would be narrower on average.

[gruez]

>>PFOF tightens the spreads and increases speed of execution.

> PFOF does not tighten "lit" spreads.

But that's fine right? This whole debate is about whether retail traders are being benefiting or losing (on net) from this. For the retail trader, the price improvement they get via PFOF is probably much better than the slightly better spreads they'll get on lit exchanges if PFOF was banned.

[masonium]

That's mine main contention.

PFOF price improvement might be hundredths of a cent (per-share) off of a 3-cent lit spread. But, if PFOF were banned and all that volume were lit instead, the lit spread might actually be 2 cents, so you'd be saving $0.005 in this universe compared to the one we live in.

[gruez]

>PFOF price improvement might be hundredths of a cent (per-share) off of a 3-cent lit spread. But, if PFOF were banned and all that volume were lit instead, the lit spread might actually be 2 cents, so you'd be saving $0.005 in this universe compared to the one we live in.

1. considering that retail volume dwarfs institutional volume[1]. Therefore I find it unlikely that there will be that much price improvement on lit exchanges.

2. part of the payment for order flow goes towards making trading free for retail traders. Even if I'm getting $0.005 better prices, that would be eaten up by the $5-$10 trade commissions I'd have to pay.

[1] https://markets.businessinsider.com/news/stocks/retail-inves...

[jdsully]

If that were true the market makers would be losing money buying the order flow, and this conversation would be moot. But instead these firms are quite profitable doing this. It’s a zero sum game so the money must come from somewhere.

[gruez]

>If that were true the market makers would be losing money buying the order flow

No, because as other comments have mentioned, retail orders are generally "non-toxic" and "uninformed", which allows market makers to quote tighter spreads while still maintaining profit.

[jdsully]

Are we then saying the loser is the institutional traders? The money does not come from thin air.

[gruez]

Essentially, yes.