Free isn't free: PFOF and the real cost
If your broker charges you no commission, where does the money come from? This module uncovers how "commission-free" brokers really earn: they sell your orders to wholesalers, earn interest on your cash and lend to you on margin. It's not necessarily a scam — it cheapened access — but it isn't free: the cost is in the spread and the execution. Knowing how your broker makes money tells you where you pay.
By the TradingCalculator.Pro team · Updated on · About us
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"Commission-free" isn't free
Old rule: if you don't pay for the product, you are the product. "Free" brokers don't give the service away; they just move the cost to places you don't see. Their three usual engines are: selling your order flow to third parties, earning interest on the cash sitting idle in your account, and charging you interest to trade on margin. Understanding where their money comes from is the first step to knowing where your cost is.
Payment for order flow (PFOF)
Instead of sending your order to the open market, the broker sells it to a wholesaler (like Citadel Securities or Virtu) that pays for that flow. It's the main revenue source for many U.S. retail brokers: in 2020 it generated about 2.5 billion dollars at just four of them. Put plainly: your order isn't a burden the broker processes for free, it's a commodity it sells.
Internalisation
The wholesaler that buys your order doesn't take it to an exchange: it executes it against its own inventory, itself taking the other side of your trade. It loves retail orders precisely because it knows they carry no superior information: it buys from you at the bid and sells to you at the ask, pocketing the spread with little risk. You think you're trading "against the market", but often you're trading against a single firm.
The invisible cost: the spread
You don't see a line that says "commission", but you pay all the same: in the spread (the gap between buying and selling) and in an execution a touch worse than the mid price. Per trade it's cents, almost imperceptible; multiplied by millions of orders it's a giant business for the wholesaler. For you, the real cost isn't zero: it's a small, constant toll that eats returns over time, especially if you trade a lot.
The conflict of interest
Here's the underlying problem: the broker has an incentive to route your order to whoever pays it the most, not necessarily to whoever gives you the best execution. Regulators and critics have flatly called it a "kickback" and warn that it reduces market transparency. It's not illegal in the U.S., but because of this very conflict the practice is restricted or banned in several places, such as the European Union.
How to protect yourself
You don't need paranoia, just a few habits. Use limit orders: you set the price and don't let them fill you worse. Compare the effective spread across brokers and be wary of "0 commissions" on illiquid assets, where the hidden spread is bigger. Favour brokers that are transparent about where they route your orders. And remember: for a long-term investor who trades little, the impact is minimal; for someone who trades a lot, it matters.