Payment for Order Flow in Web3

May 29, 2022

If Robinhood offers commission-free stock trading, how does it make money? Most of Robinhood's revenue comes from Payment for Order Flow (PFOF). Payment for Order Flow is when retail exchanges send their orders to a wholesale broker instead of directly to the exchange. For example, Citadel (a market maker, among other things) buys order flow from Robinhood (Citadel spent $1.5 billion on order flow last year). The market maker can then make money off the bid/ask spread. So while retail investors might not get the best execution of their trades, the friction to participating (via the removal of upfront fees) is lower.

While PFOF isn't widespread in web3 (yet), there's something that's essentially the same thing called Miner Extractable Value (MEV). MEV relies on the fact that blockchain miners can (1) see transactions before they are verified and (2) reorder transactions within a block. MEV captures arbitrage from crypto retail users and redirects it to the network's miners (or stakers).

MEV is PFOF. It's information given to privileged parties before transactions occur. So whether they make money through the bid/ask spread or through newer MEV arbitrage doesn't matter.

FTX, a crypto-exchange, recently disclosed a 7.8% ownership of Robinhood. Robinhood also announced a zero network fee non-custodial web3 wallet. So how will Robinhood offer zero fees on networks with traditionally high transaction fees? They have said that they will not be doing PFOF in crypto. But you don't need PFOF when you have MEV.

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