First American News LLC: Raleigh, NC: Brokerages serving individual investors received a windfall last year for selling their customers’ order flow to electronic trading firms, even as the practice faced increasing scrutiny from regulators.
The dozen largest U.S. brokerages earned a combined $3.8 billion for selling their customers’ stock and options orders last year, up 33% from 2020, according to new data compiled by Bloomberg Intelligence and released Tuesday.
Behind the boom was the groundswell of activity by individual investors during the Covid-19 pandemic. As more Americans opened brokerage accounts and swarmed into meme stocks and options, their brokers reaped more payment for order flow, as the practice is called.
Charles Schwab Corp. was the biggest recipient of such payments, collecting a combined $1.7 billion across its Schwab and TD Ameritrade brokerage units last year, according to the Bloomberg data. Behind it was Robinhood Markets Inc. which earned $974 million from selling order flow, the data show.
In payment for order flow, brokers route their customers’ orders to electronic trading firms known as market makers. The market makers execute the orders and make a profit, typically by collecting a small difference between the buying and selling price of a stock or an options contract. In return, the market maker pays the broker for the right to fill the investors’ orders.
Citadel Securities continued to be the biggest source of payment for order flow. The electronic trading giant founded by hedge-fund billionaire Ken Griffin paid the 12 brokerages tracked by Bloomberg just under $1.5 billion for order flow last year, the data show. Other large sources of the payments were Susquehanna International Group LLP and Wolverine Trading LLC, a pair of low-profile trading firms that are significant players in options markets. Click Here To Continue Reading on Bloomberg News.