When you place a trade through a brokerage that advertises zero commissions, you might assume the transaction costs you nothing. But a 2024 Securities and Exchange Commission (SEC) report documented that one brokerage's order-routing practices added roughly eleven cents per share to the cost of every trade. That hidden fee, siphoning silently from each transaction, can accumulate to significant sums over time, especially for frequent traders. The following explains how that profit is generated, who collects it, and what it means for the millions of investors who now trade in a supposedly fee-free world.

The Hidden Toll on Every Trade

The eleven cents per share figure emerged from an SEC report that examined the order-routing practices of several major brokerages, but the specific brokerage in question was not named in the public filing. Industry analysts have since identified it as a leading zero-commission platform. The report highlighted how brokers can earn more when a trade costs more, creating a fundamental tension between the broker's interest and the client's best execution. For a typical retail trade of 200 shares, that hidden toll amounts to roughly $22—far exceeding any visible commission that might have applied in an earlier era.

What makes this practice particularly insidious is its invisibility. Most investors never see the charge. It is embedded in the spread between the bid and ask price, a gap that market makers exploit when they execute orders. The broker receives a payment from the market maker for routing the order, and that payment comes out of the investor's pocket in the form of a slightly worse execution price. The SEC report made clear that this is not an anomaly but a systematic feature of the current market structure.

The practice is known as payment for order flow (PFOF). While it has existed for decades, its scale has grown enormously in the era of zero-commission trading. Brokerages like Robinhood, Charles Schwab, and TD Ameritrade (now part of Schwab) rely on PFOF for a substantial portion of their revenue. According to the SEC, the average payment per share across the industry in 2023 was roughly 0.11 cents, but for certain brokerages and certain types of orders, the figure was much higher—in some cases, over a dollar per share for options trades.

For stocks, the eleven cents per share figure represents an upper bound for some brokerages, but even at lower averages, the cumulative effect is striking. A buy-and-hold investor making few trades may barely notice. But for active traders who execute dozens or hundreds of trades per month, the hidden costs can dwarf any visible fees. The SEC's report was a wake-up call for regulators and investors alike, revealing a system where the cheapest visible option often masks the most expensive hidden one.

How Order Routing Becomes a Revenue Stream

To understand how eleven cents per share becomes profit, it helps to walk through the mechanics. When a retail investor clicks "buy" on 100 shares of a stock, the brokerage does not send that order directly to a public exchange like the New York Stock Exchange. Instead, it routes the order to a market maker—a large financial firm such as Citadel Securities or Virtu Financial. These market makers execute the trade from their own inventory, and they pay the brokerage for the privilege of doing so.

The payment is possible because the market maker can profit from the spread. If a stock has a bid price of $10.00 and an ask price of $10.01, the spread is one cent. When a retail investor buys at $10.01, the market maker might have bought at $10.00, capturing the one-cent spread. But the market maker also pays the brokerage a fraction of that spread—say, 0.11 cents per share—as a rebate. The brokerage thus earns revenue without charging the customer a direct commission.

This arrangement creates an incentive misalignment. The brokerage earns more when the spread is wider, because the market maker can afford to pay a larger rebate. A wider spread means a worse execution price for the investor. In theory, the brokerage should seek the best possible price for its client. In practice, the brokerage may route orders to the market maker that pays the highest rebate, not the one that offers the best execution.

Regulatory filings, such as the SEC's Rule 606 reports, require brokerages to disclose where they route orders and what payments they receive. These reports show that the largest market makers—Citadel Securities and Virtu Financial—capture the vast majority of retail order flow. The payments are substantial: Citadel Securities alone paid brokerages over $3 billion in 2023 for order flow. That money ultimately comes from the spreads that retail investors pay, making the hidden toll a multibillion-dollar transfer from Main Street to Wall Street.

The Cumulative Cost: A Penny Here, a Penny There

The eleven cents per share figure may seem small in isolation, but its cumulative effect is staggering. Consider an active trader who executes 10 trades per day, each averaging 200 shares. That is 2,000 shares per day, or roughly 40,000 shares per month (assuming 20 trading days). At eleven cents per share, the hidden cost is $4,400 per month—over $50,000 per year. Even at a more conservative average of two cents per share, the cost would be $800 per month.

Academic studies have attempted to quantify the total hidden cost of PFOF. A 2023 working paper by researchers at the University of Chicago and the SEC estimated that retail investors lost roughly $5 billion annually due to inferior execution prices caused by PFOF. That figure exceeds the total visible commissions that investors would have paid in a traditional commission-based model. In other words, the shift to zero commissions has not eliminated costs; it has merely shifted them into a less transparent form.

The cost compounds with high-turnover strategies. Investors who trade frequently—day traders, momentum traders, or those using leveraged ETFs—are particularly vulnerable. A strategy that appears profitable on paper may be rendered unprofitable by the hidden toll. For long-term buy-and-hold investors, the impact is smaller but still real. A single trade every few months might incur only a few dollars in hidden costs, but over decades, those dollars add up, reducing the compounding effect of returns.

Not all brokerages engage in PFOF to the same degree. Some, like Fidelity, have long routed orders to maximize execution quality rather than rebates. Others, like Interactive Brokers, offer a choice: investors can opt for "best execution" routing or accept PFOF in exchange for lower commissions. But for the millions of investors who use zero-commission platforms, the default is almost always PFOF, and the hidden cost is rarely disclosed upfront.

Market Makers' Role in the Profit Chain

The market makers that pay for order flow are not passive intermediaries; they are sophisticated high-frequency trading firms that use algorithms to capture tiny price improvements. Citadel Securities and Virtu Financial dominate the market, handling the majority of retail order flow in the U.S. Their business model relies on the predictability of retail orders. Unlike institutional orders, which may signal large moves, retail orders are often small and uninformed—they are less likely to be based on material non-public information. This predictability allows market makers to profit with minimal risk.

When a market maker receives a retail order to buy, it can simultaneously hedge by selling short on an exchange, or it can simply fill the order from its own inventory at a slight markup. Because the market maker knows the retail order is unlikely to move the market, it can offer a price that is slightly worse than the best available price on the public exchange, yet still better than what the investor might have gotten without the market maker's liquidity. The difference is the market maker's profit, part of which is shared with the brokerage.

Critics argue that this arrangement amounts to a tax on unsophisticated investors. Retail traders, who may not understand the mechanics, pay more for their trades than institutional investors do. The market makers defend the practice by pointing to the narrow spreads they offer—often just a penny or two—and the fact that retail execution quality has improved over the past decade. Indeed, the SEC's own data shows that retail investors often get prices that are slightly better than the national best bid or offer (NBBO), thanks to "price improvement" offered by market makers.

But the price improvement is typically very small—often a fraction of a cent per share—while the payment for order flow can be several times larger. In effect, the market maker gives back a small portion of the spread to the investor while pocketing the rest. The net result is that the investor gets a marginally better price than the worst possible, but still pays more than they would in a fully transparent auction market. The debate over whether this system is fair or efficient remains unresolved, with regulators and industry participants offering competing perspectives.

Regulatory Scrutiny and Industry Pushback

The SEC has taken notice of the hidden costs of PFOF. In 2024, the agency proposed a rule that would require brokerages to disclose the total transaction cost—including the effect of PFOF—to clients before each trade. The rule would also require brokerages to conduct a "best execution" analysis that considers the quality of execution, not just the price. The proposal was met with fierce opposition from the industry, which argued that the current system already provides best execution and that additional disclosure would confuse investors.

The industry's main argument is that PFOF allows for zero commissions, which has democratized access to the stock market. Since 2019, when Robinhood pioneered commission-free trading, millions of new investors have entered the market. The industry claims that forcing brokerages to disclose hidden costs would undermine this progress and potentially lead to a return to per-trade fees. The SEC counters that investors have a right to know what they are paying, and that transparency would foster competition on execution quality rather than on rebates.

As of mid-2026, the SEC's proposed rule has not been finalized. The agency has faced legal challenges from industry groups, and the outcome remains uncertain. Meanwhile, some brokerages have voluntarily begun to disclose more information about their order-routing practices. For example, Robinhood now shows a "Net Transaction Cost" on trade confirmations that includes the estimated cost of PFOF. But the disclosure is not standardized, and many investors still do not know how to interpret it.

Regulatory efforts have also focused on options trading, where PFOF payments are significantly larger. The SEC has proposed a pilot program to cap payments for options orders, similar to a program that was tested in the early 2000s. The options market is particularly opaque, with spreads that can be wide and payments that can exceed several dollars per contract. The outcome of these regulatory efforts will shape the future of retail trading for years to come.

What Investors Can Do to Protect Themselves

While the regulatory process unfolds, individual investors can take steps to reduce the hidden costs of trading. One of the most effective strategies is to use limit orders instead of market orders. A limit order specifies the maximum price you are willing to pay (for a buy) or the minimum price you are willing to accept (for a sell). By using limit orders, you control the execution price and prevent the market maker from capturing a wider spread. However, limit orders may not always be filled, especially in fast-moving markets.

Another step is to compare broker execution quality reports. The SEC requires brokerages to publish Rule 606 reports that show where orders are routed and what payments are received. While these reports can be dense, they offer valuable information. Investors can look for brokerages that route to market makers with high "price improvement" rates—the percentage of orders that receive a price better than the NBBO. Fidelity and Vanguard, for example, have historically routed orders in a way that minimizes hidden costs.

Investors can also consider using exchange-listed ETFs that trade on public exchanges rather than over-the-counter. ETFs that trade on exchanges have more transparent pricing and are less susceptible to PFOF, because their orders are more likely to be routed to lit venues. Additionally, some brokerages offer alternative routing options. Interactive Brokers, for instance, allows clients to choose "IB SmartRouting" which seeks the best available price across multiple venues, but charges a small commission. For active traders, the commission may be worth the savings in hidden costs.

Finally, investors can check the FINRA Trade Reporting Facility (TRF) data to see the execution quality of their brokerage. FINRA publishes quarterly reports that compare execution quality across brokerages, including metrics like average price improvement and effective spreads. While these reports are not easy to parse, they provide a way to hold brokerages accountable. By making informed choices, investors can ensure that the promise of low-cost trading is not undermined by hidden fees that erode returns.

The Real Cost of 'Commission-Free' Trading

The rise of zero-commission trading has been hailed as a democratizing force, bringing millions of new investors into the market. But the hidden costs of payment for order flow complicate that narrative. The eleven cents per share figure, while not universal, illustrates how the system can extract value from retail investors in ways that are not immediately apparent. For the average investor, the difference between a brokerage that prioritizes execution quality and one that maximizes rebates can amount to hundreds or thousands of dollars per year.

The debate over PFOF is ultimately a debate about transparency. Proponents argue that the current system delivers narrow spreads and free trades, benefiting the majority of investors. Critics contend that the lack of disclosure allows brokerages to profit at their clients' expense. The truth likely lies somewhere in between. As regulatory efforts continue, investors would do well to educate themselves about the true cost of their trades and to demand clear, upfront disclosure from their brokerages.

Meanwhile, the onus is on individual investors to look beyond the headline of "zero commissions." A trade that appears free may cost more than one that carries a small explicit fee but offers better execution. As with many products in finance, the cheapest option on the surface is not always the most cost-effective in practice. For a deeper look at how hidden fees erode returns, see our related article on mutual fund fee layers.

Whether through PFOF, mutual fund expense ratios, or insurance policy fine print, costs have a way of hiding in plain sight. Our article on disability insurance revenue offers another example of how commissions and fees can undermine the value of a financial product. By staying informed and asking the right questions, investors can protect themselves from the hidden toll that silently siphons their returns.

Disclaimer: This article is for informational purposes only and does not constitute personalized financial or investment advice. Individual circumstances vary, and readers should consult a qualified professional before making investment decisions.