Zero-fee brokerage, Public.com announced on Monday that it would no longer route orders to market makers, instead will send them directly to exchanges for trade execution.
Payment for Order Flow or PFOF is the model by which the brokerages send the orders to wholesale market players for a price who get the first shot in execution. These players execute the orders internally in off-exchange trading venues or send them to exchange.
The PFOF business model was popularized with the rise of the commission-free model among the brokers. However, the technique remained controversial due to the possibility of a conflict of interest.
Popularized by Robinhood with its zero-fee offering, many brokerages have now turned to PFOF to go commission-free and monetize their business. Earlier, Robinhood paid a fine of $65 million for misleading customers with their order execution.
‘There Is No Such Thing as Free Trades’
Public.com pointed out that traders do not approach these platforms because of zero trading fees, ‘but rather because of a lack of financial literacy.’
“The reality is that there is no such thing as free trades,” Public.com stated in its Medium post.
Public.com will now feature a tipping option by the traders, which will be optional. It is to be seen if the broker can sustain this monetization model or will return PFOF or start charging fees.
“Trades will remain commission-free and tipping is entirely optional,” the brokerage noted. “Members of the Public.com community can freely decide if they’d like to leave a tip to help pay for the cost of executing their trades.”
“Direct routing to the exchanges is more expensive, and therefore we’re turning what used to be a revenue stream (PFOF) into a cost center and we’re optimistic that the difference will be offset by the optional tipping feature.”
The decision came when there is chaos going on in the trading market. The coordinated pump of certain stocks by amateur traders has clogged many brokerages due to the high trading volume.