The cost of free trades

The Weekly Habit

Last week we asked our audience which college degrees lead to the top annual salary post-grad. Over 31% of respondents selected the correct answer (computer science).

What does PFOF stand for?

This is an acronym within financial services

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The Explosion of Retail Trading

$0 commission trades are a game changer, but there’s a reason why large brokerages are able to offer these to their clients.

And it’s not because they want to make less money…


Over 30 million brokerage accounts were created between 2020 and 2021 across well known commission free trading platforms.

PFOF is how these offerings are possible.

Trivia Answer: Payment For Order Flow

“Free” Trading 📈 

Retail trading hit an all time high in 2023.

In one week alone, it accounted for 23% of trading volume —proving that the power of the retail investor is more than just the meme stock frenzy.

But there’s no such thing as a free lunch.

How PFOF Works

In the PFOF model, brokers (e.g. Robinhood) reroute your trades to a third party market maker instead of the exchange (e.g. Nasdaq).

Critics of PFOF argue there is a conflict of interest for the broker since the market maker pays for your trade.

CNBC Article - June 30, 2021

It’s why Robinhood was fined $65 million a few years ago. PFOF resulted in customers paying higher prices to execute trades.

PFOF Criticisms

It’s another reason to create distrust in an industry that already has a mixed reputation.

Also, we didn’t even dive into the dangers of day trading and how free trading can enable harmful investing behavior.

Stay tuned for next week :)

My Key Takeaway

It’s the little details most investors miss when opening accounts or trading themselves. When in doubt ask a financial advisor.

Don’t have a financial advisor? Find yours at Habits!

Thanks for reading, Habits fam. See you back here next week for more.


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