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Payment for Order flow where BD receives payment from a MM must be disclosed to the customer?

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Final answer:

Payment for Order Flow (PFOF) is a practice in the financial industry where a broker-dealer (BD) receives payment from a market maker (MM) in exchange for routing customer orders to them. The practice is required to be disclosed to customers as part of the broker-dealer's duty to provide transparency and fair dealing.

Step-by-step explanation:

Payment for Order Flow (PFOF) is a practice in the financial industry where a broker-dealer (BD) receives payment from a market maker (MM) in exchange for routing customer orders to them. The practice is required to be disclosed to customers as part of the broker-dealer's duty to provide transparency and fair dealing.

When a BD receives payment for order flow, they have a duty to disclose this to the customer. This disclosure can be made through various means, such as including it in the account opening documents or providing it through a separate written communication.

The purpose of this disclosure is to ensure that customers are aware of the potential conflict of interest that arises when a BD receives payment for order flow. It allows customers to make informed decisions and understand the implications of order routing on execution quality.

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