m a r k et ma k er co rner
// By Eric Flesche
Payment for order flow At Glendale Securities, Inc., we mainly make markets in OTC securities for our customers. We charge our customers a commission for execution and use our market making capabilities to facilitate customer executions.
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e are often asked why we don’t offer commission free trading like some of the online retail brokerage firms offer. Wait, how can a broker dealer offer commission free trading? The answer to that question requires a discussion on the practice of payment of order flow, and a clarification on when payment for order flow is paid to brokers. Many large retail brokerage firms including the online ones you are probably familiar with do not make markets in stocks. To fill your order, brokerage firms have a couple of options, each with their own cost/profit structure. They can
80 MicroCap Review Magazine
send your order to an exchange or ATS, but those often charge the broker on a net basis for execution. They can execute the order internally as a market maker, but that requires staff, technology, and risk capital that may be too cost prohibitive. Another option is to send customer orders to a wholesale market maker who pays the brokerage firm for its order flow. If you must choose between the three options outlined above, receiving payment for order flow for sending orders to a wholesale market maker seems like it’s the smartest option for the brokerage firm. The brokerage firm eliminates costs, doesn’t
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