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.