You click “buy.” A fraction of a second later, 300 shares of a stock appear in your account. Done. Easy.
But what actually happened in that fraction of a second?
Most beginners—and honestly, most intermediate traders—have no idea. They treat the space between their click and their fill like a black box. Order goes in. Shares come out. Who cares what happens in between?
You should care. Because inside that black box is an entire ecosystem of firms, exchanges, and financial incentives that directly affect the price you pay, how fast you get filled, and who profits from your activity. Understanding this system doesn’t require a PhD in market microstructure. It just requires knowing the basics of who’s involved, what they do, and why they do it.
If you’ve been following our Beginner’s Guide series, you’ve already learned how order types work and why your fill price sometimes differs from what you expected. This article answers the deeper question: who is on the other side of your trade, and how does the whole machine actually work?
The answer starts with one of the most important—and most misunderstood—players in financial markets.
What Is a Market Maker and Why Do They Exist?
A market maker is a firm that stands ready to buy and sell a stock at publicly quoted prices, continuously, throughout the trading day. The SEC’s definition is straightforward: a market maker is “a firm that stands ready to buy or sell a stock on a regular and continuous basis at a publicly quoted price.”
Think of a market maker like a car dealer. A car dealer doesn’t drive the cars they sell. They buy vehicles from sellers at one price (wholesale) and sell them to buyers at a slightly higher price (retail). The difference between what they pay and what they charge—the markup—is how they make money. They maintain an inventory of cars so that when a buyer walks onto the lot, something is always available. And when a seller wants to unload a vehicle, the dealer is always willing to buy.
Market makers do the same thing with stocks. They constantly quote two prices: a bid (the price they’ll buy at) and an ask (the price they’ll sell at). The difference between those two prices—the bid-ask spread—is their primary source of profit.
If a stock’s bid is $50.00 and the ask is $50.02, the market maker is offering to buy your shares at $50.00 and sell shares to you at $50.02. If they buy 1,000 shares at $50.00 and immediately sell 1,000 shares at $50.02, they pocket $20. That sounds tiny—and it is, on a single trade. But market makers handle millions of shares across thousands of stocks every day. Those pennies stack up fast.
Why do markets need them?
Without market makers, you’d have to wait for another individual trader who wants to buy the exact stock you’re selling, at the exact moment you want to sell, for a price you both agree on. That could take seconds, minutes, or hours—especially for less popular stocks. Market makers solve this by always standing ready as the counterparty. They provide liquidity—the ability to buy or sell quickly without significantly moving the price.
The result: when you click “buy,” there’s almost always someone to sell to you. When you click “sell,” there’s almost always someone to buy from you. That immediacy exists because market makers are willing to take the other side of your trade, absorbing the risk of holding inventory, in exchange for earning the spread.
Major market-making firms you’ve probably never heard of—Citadel Securities, Virtu Financial, Susquehanna International Group, Jane Street—collectively handle the vast majority of retail stock orders in the United States. They’re the invisible engine that keeps the market running smoothly every second of every trading day.
The Journey of Your Order: From Click to Fill
Let’s follow a single trade from the moment you click “buy” to the moment shares appear in your account. Understanding this journey reveals who’s involved and where the friction—and the money—lives.
Step 1: You Click “Buy”
You’re watching a stock trading at $32.50. You decide to place a market buy order for 300 shares through your broker’s platform. You click the button.
Step 2: Your Broker Receives the Order
Your order travels through the internet to your broker’s servers. The broker now has a decision to make: where should they send this order to get it filled?
Your broker has several options. They could send it to a public stock exchange like the NYSE or Nasdaq, where it would be matched against sell orders in the exchange’s order book. They could send it to an Electronic Communications Network (ECN), which is another type of trading venue. Or—and this is what happens with the majority of retail orders in the United States—they could send it to a wholesale market maker.
Step 3: The Market Maker Receives Your Order
In most cases, your broker routes your market order to a wholesale market maker like Citadel Securities or Virtu Financial. The market maker examines your order, checks the current best available prices across all exchanges (the NBBO, which we’ll explain shortly), and decides how to fill it.
The market maker has inventory—shares they’ve already purchased or can quickly acquire. They fill your 300-share buy order from their own inventory or by simultaneously buying shares on an exchange and selling them to you, pocketing the difference.
Step 4: You Get Your Fill
The market maker executes your order at the current ask price—or sometimes slightly better (called price improvement). The fill confirmation appears on your screen. Total elapsed time from click to fill: typically under one second for liquid stocks.
Step 5: Settlement
Behind the scenes, the actual exchange of money and shares between your broker, the market maker, and the clearinghouse takes one business day (called T+1 settlement in the United States). But from your perspective as a trader, the position appears in your account immediately.
Here’s the part most beginners miss: your order probably never touched a public stock exchange at all. For most retail orders placed through commission-free brokers, the trade happens entirely between your broker and a wholesale market maker. This process is called internalization—the market maker fills your order internally rather than routing it to an exchange.
That’s not inherently bad. The market maker is required by regulation to give you a price at least as good as the best available price on public exchanges. But it does mean there’s a layer between you and the public market that most traders don’t realize exists.
The NBBO: The Price Guardrail That Protects You
If your order is being routed to a market maker instead of a public exchange, how do you know you’re getting a fair price? That’s where the NBBO comes in.
NBBO stands for National Best Bid and Offer. It’s the best available bid price and the best available ask price across all U.S. stock exchanges at any given moment. The SEC requires that all market makers and brokers either match or beat the NBBO when executing your order.
Here’s how it works in practice. Imagine five different stock exchanges are all quoting prices for the same stock:
- Exchange A: Bid $50.25 / Ask $50.30
- Exchange B: Bid $50.26 / Ask $50.29
- Exchange C: Bid $50.24 / Ask $50.31
- Exchange D: Bid $50.27 / Ask $50.28
- Exchange E: Bid $50.25 / Ask $50.29
The NBBO takes the highest bid ($50.27, from Exchange D) and the lowest ask ($50.28, from Exchange D). So the NBBO is $50.27 / $50.28.
When a market maker fills your buy order, they must fill it at $50.28 or better. They can’t sell you shares at $50.31 just because that’s what Exchange C is quoting—the NBBO prevents it.
In practice, many market makers actually provide price improvement—filling your order at a price slightly better than the NBBO. If the NBBO ask is $50.28, the market maker might fill you at $50.275. That half-cent per share is genuine savings, even if it sounds trivial. On 300 shares, it’s $1.50. Over thousands of trades, it adds up.
The NBBO isn’t perfect. It’s a snapshot that changes thousands of times per second. By the time your order arrives, the NBBO may have shifted. And the NBBO only reflects the best prices on lit exchanges—it doesn’t include hidden orders or dark pool activity. But for retail day traders, the NBBO is the primary regulatory guardrail ensuring you get a competitive price regardless of where your order is routed.
Payment for Order Flow: Why “Free” Trading Isn’t Free
Here’s the question that ties everything together: if your broker doesn’t charge you commissions, how do they make money?
The answer, for many major retail brokers, is payment for order flow (PFOF).
PFOF is a practice where market makers pay your broker a small fee—typically fractions of a penny per share—in exchange for the broker routing your orders to them. Your broker receives cash for sending your trades to Citadel Securities instead of directly to the NYSE. The market maker is essentially paying for the privilege of filling your order.
The numbers are significant at scale. The top three wholesale market makers—Citadel Securities, Virtu Financial, and G1 Execution Services—handle over 80% of U.S. retail equity orders. Collectively, major retail brokerages earned billions of dollars in PFOF revenue in recent years. Robinhood, one of the most prominent commission-free brokers, has historically derived the majority of its revenue from PFOF.
So where does the market maker’s money come from?
The market maker profits from the bid-ask spread. They buy at the bid and sell at the ask. If the NBBO spread is $0.02, they can potentially earn up to $0.02 per share. Out of that spread profit, they pay a fraction of a penny back to the broker as PFOF and keep the rest. They might also provide you with price improvement—a fill slightly better than the NBBO—which reduces their margin but still leaves them profitable on aggregate.
Is PFOF bad for you?
This is genuinely debated, and honest people disagree.
The case for PFOF: it enables commission-free trading, which has dramatically reduced the cost of investing and trading for millions of retail participants. Market makers argue they provide better execution quality (price improvement) than public exchanges for small retail orders. Before PFOF-funded zero-commission trading, retail traders paid $5-$10 per trade in commissions—visible costs that were often worse than the invisible costs of PFOF.
The case against PFOF: it creates a conflict of interest. Your broker has a financial incentive to route your order to the market maker that pays them the most, not necessarily the one that gives you the best fill. Critics argue that the “price improvement” is often a fraction of what the market maker earns from the spread, and that retail traders would get better prices if their orders competed directly on public exchanges. The practice has been banned in the UK, Canada, Australia, and is being phased out across the European Union—suggesting that many regulators believe the conflicts outweigh the benefits.
What our team thinks you should know:
PFOF is a reality of the current market structure. As a beginner day trader, you can’t opt out of it unless you use a broker that doesn’t accept PFOF—firms like Interactive Brokers (Pro accounts) or Fidelity, which route more orders directly to exchanges. The practical impact of PFOF on a single trade is small—fractions of a penny. But for active day traders placing dozens of orders daily, those fractions compound into real money, just like slippage does.
The SEC requires brokers to disclose their PFOF arrangements in quarterly Rule 606 reports. You can check your broker’s reports on their website to see exactly where your orders are being sent and how much they’re receiving.
Why Market Makers Want YOUR Orders (And What That Means)
Here’s something that might surprise you: market makers don’t just accept your orders—they actively pay to get them. Why would a sophisticated firm with billions in technology infrastructure pay for the privilege of trading against you?
The answer lies in a concept called adverse selection—and understanding it reveals something important about your role in the market ecosystem.
Market makers face a risk every time they take the other side of a trade. If they buy 1,000 shares from a seller at $50.00, the price might drop to $49.90 before they can sell, costing them $100. This risk is manageable when they’re trading against uninformed traders—people buying or selling for reasons unrelated to where the stock is headed next (rebalancing a portfolio, cashing out for a car payment, or a new day trader learning the ropes).
The risk becomes dangerous when they’re trading against informed traders—hedge funds, institutional desks, or sophisticated algorithm operators who may know something the market doesn’t. These traders tend to be right more often than random chance would predict, which means the market maker frequently ends up on the losing side.
Retail traders—meaning you, as an individual—are statistically more likely to be uninformed. Not because you’re foolish, but because you’re unlikely to have material non-public information or the kind of quantitative infrastructure that gives institutional traders their edge. Your trades are more random from the market maker’s perspective, which makes them safer to trade against.
This is precisely why market makers pay brokers for retail order flow. Retail flow is “clean”—it’s lower-risk inventory for the market maker. They can profitably take the other side of your trades and earn the spread without the elevated risk of getting picked off by a hedge fund’s algorithm.
What does this mean for you? It’s neither good nor bad—it’s simply how the system works. Market makers aren’t targeting you or working against your interests. They’re providing a service (liquidity and fast execution) in exchange for compensation (the spread). Your awareness of this dynamic simply helps you understand why execution works the way it does—and why choosing the right broker, the right order types, and the right stocks matters more than most beginners realize.
What This Means for You as a Day Trader
Understanding market makers and order flow doesn’t change your chart analysis or your strategy. But it changes how you think about execution—and execution is where strategies succeed or fail.
Practical takeaway #1: Liquidity is your friend.
Market makers provide tighter spreads and faster fills on liquid, high-volume stocks because there’s more competition for your order. When you trade stocks with deep order books, you benefit from that competition through tighter spreads and more price improvement. When you trade illiquid stocks, market makers widen their spreads to compensate for the risk—and you pay the difference. Tools like Trade Ideas can help you filter for high-volume stocks where execution quality is naturally better—an overlooked advantage of scanning for liquidity, not just setups.
Practical takeaway #2: Your order type affects who profits.
When you use a market order, you’re accepting whatever price the market maker offers. You’re providing the urgency, and the market maker captures the spread. When you use a limit order, you’re competing with the market maker by posting your own price. You’re providing liquidity instead of consuming it. This is why limit orders consistently produce better fills for active day traders—you’re shifting from being a price-taker to a price-maker.
Practical takeaway #3: Not all brokers route orders the same way.
Some brokers prioritize speed and convenience, routing nearly everything to one or two market makers. Others offer more routing options, including direct exchange access, which can matter for active traders. If execution quality is important to you—and as a day trader, it should be—research your broker’s order routing practices. Their Rule 606 reports (available on their website) reveal where your orders go. We compare broker features, execution quality, and routing options in our Day Trading Toolkit.
Practical takeaway #4: Understand the spread before you trade.
The bid-ask spread isn’t just a number on your screen—it’s the market maker’s compensation for providing liquidity. A wide spread means the market maker perceives risk in that stock (low liquidity, high volatility, or both). Trading stocks with wide spreads means paying more for execution on every single trade. We cover this in depth in our guide to the bid-ask spread.
Practical takeaway #5: The difference between brokers designed for investors and brokers designed for traders is real.
Commission-free brokers funded by PFOF are perfectly adequate for casual investors and even many beginning day traders. But as your trading becomes more active—dozens of trades daily, precise entry prices, scalping strategies—the execution differences between a PFOF-funded retail broker and a direct-access broker become meaningful. We’ll explore this distinction in our next article on Direct Market Access vs. Retail Order Routing.
What’s Next in Your Day Trading Journey
Now that you understand the invisible system that connects your order to the market, the natural next question is: can you choose a better path? Not all order routing is created equal. Some brokers give you the ability to bypass wholesale market makers and send your orders directly to stock exchanges—a feature called direct market access. It’s faster, more transparent, and can save active traders real money on execution.
→ Next Article: Understanding Direct Market Access (DMA) vs. Retail Order Routing
Frequently Asked Questions
What is a market maker in simple terms?
Quick Answer: A market maker is a firm that continuously buys and sells a stock at publicly quoted prices, providing liquidity so that you can trade instantly instead of waiting for another individual trader to appear.
Market makers quote two prices at all times: the bid (the price they’ll buy at) and the ask (the price they’ll sell at). The difference between those prices—the spread—is how they profit. Without market makers, trading would be slower, spreads would be wider, and finding someone to take the other side of your trade would be far more difficult, especially for less popular stocks. Major market-making firms like Citadel Securities and Virtu Financial handle the majority of U.S. retail stock orders.
Key Takeaway: Market makers are the reason your “buy” button works almost instantly. They’re essential infrastructure, and understanding how they profit helps you make smarter execution decisions.
How do market makers make money?
Quick Answer: Market makers primarily profit from the bid-ask spread—buying at the bid price and selling at the ask price. They also earn through payment for order flow arrangements with brokers.
If a market maker buys shares at $50.00 (the bid) and sells them at $50.02 (the ask), they earn $0.02 per share. On a single trade, that’s tiny. But across millions of shares traded daily across thousands of stocks, the profits are enormous. Market makers also manage risk through sophisticated hedging strategies and technology that allows them to adjust their quotes thousands of times per second in response to changing market conditions.
Key Takeaway: The spread is the market maker’s fee for providing liquidity. Tighter spreads mean lower costs for you—which is why trading liquid stocks with tight spreads directly benefits your bottom line.
What is payment for order flow (PFOF)?
Quick Answer: PFOF is a practice where market makers pay your broker a small fee (fractions of a penny per share) in exchange for the broker routing your orders to them instead of to a public exchange.
This arrangement is what enables commission-free trading at brokers like Robinhood, Webull, and E-Trade. The market maker pays the broker, the broker doesn’t charge you a commission, and the market maker profits from the spread on your trades. Collectively, this practice generates billions of dollars annually across the industry. It’s controversial because it creates a potential conflict of interest—your broker may be incentivized to route to the highest-paying market maker rather than the one offering you the best execution.
Key Takeaway: “Commission-free” doesn’t mean cost-free. The cost is embedded in the execution through the bid-ask spread and the order routing decisions your broker makes. Check your broker’s Rule 606 report to see where your orders go.
Does PFOF hurt my trading?
Quick Answer: For individual trades, the impact is usually small—fractions of a penny per share. For active day traders executing hundreds of trades monthly, those fractions compound into meaningful costs.
Market makers are required to fill your order at the NBBO or better, so you’re not getting blatantly ripped off. Many market makers actually provide price improvement—filling you at a slightly better price than the best available. But critics argue the improvement is only a fraction of what the market maker earns from the spread, and that direct exchange access would often produce better results. For a casual investor making a few trades per month, PFOF is essentially irrelevant. For an active day trader, it’s worth understanding and factoring into your broker selection.
Key Takeaway: PFOF matters most for active traders. If you’re executing dozens of trades daily, consider brokers that offer direct exchange routing. For beginners still learning, it’s not the first priority—but it’s worth understanding early.
What is the NBBO and why does it matter?
Quick Answer: The NBBO (National Best Bid and Offer) is the best available buy price and sell price across all U.S. stock exchanges. By law, your order must be filled at the NBBO or better.
The NBBO aggregates prices from all 16 U.S. stock exchanges to establish the fairest available bid and ask. If the best bid anywhere is $50.27 and the best ask is $50.28, no broker or market maker can fill your buy order at $50.29—they must match or beat $50.28. This regulation protects you from receiving unfair prices regardless of where your order is routed.
Key Takeaway: The NBBO is your price protection floor. It doesn’t guarantee perfect fills—it changes thousands of times per second—but it ensures you’re always within the range of the best publicly available prices.
What does “internalization” mean?
Quick Answer: Internalization is when a market maker fills your order from their own inventory instead of routing it to a public stock exchange. Most retail stock orders in the U.S. are internalized.
When you buy 300 shares through a commission-free broker, the wholesale market maker typically sells you those shares from their existing inventory—the trade never appears on the NYSE or Nasdaq order book. This can actually be faster and sometimes provides slight price improvement. But it also means your order doesn’t contribute to public price discovery on exchanges, which some market structure experts argue reduces overall market transparency.
Key Takeaway: Internalization isn’t inherently harmful to you as a trader, but it means the execution of your order is less transparent than an exchange-matched trade. Understanding this helps you make informed broker choices as your trading grows.
Can I choose where my orders are routed?
Quick Answer: Most retail brokers don’t let you choose. However, some brokers—particularly those catering to active traders—offer direct routing options that let you send orders to specific exchanges or ECNs.
Interactive Brokers, for example, offers direct exchange access for its Pro accounts (which do charge commissions). Some other active-trader-focused platforms provide similar capabilities. This matters because different venues can offer different execution quality depending on the stock, order size, and market conditions. We’ll cover this distinction in detail in our article on Direct Market Access vs. Retail Order Routing.
Key Takeaway: If you’re a beginner, your broker’s default routing is fine while you learn. As you become more active, understanding and controlling order routing becomes a genuine competitive edge.
Why do market makers prefer retail orders over institutional orders?
Quick Answer: Retail orders are statistically less likely to be based on superior information, making them lower-risk for market makers to trade against. Institutional orders carry higher “adverse selection” risk.
Market makers lose money when they trade against someone who knows something the market doesn’t—like a hedge fund with a sophisticated quantitative model. Retail traders, by contrast, generally trade based on publicly available information and personal analysis, making their trades more “random” from the market maker’s perspective. This lower information risk means the market maker can profitably earn the spread without as much fear of being on the wrong side. It’s why they pay billions annually for the privilege of accessing retail order flow.
Key Takeaway: You’re not being exploited—you’re being served by a system designed around the statistical properties of your trading. But understanding this dynamic reinforces why execution quality and order type selection matter so much.
Do market makers manipulate stock prices?
Quick Answer: Market makers adjust prices based on supply and demand, which is their legitimate role. However, concerns about manipulative practices do exist, and regulators actively monitor for violations.
When a market maker widens the spread during volatile conditions, that’s not manipulation—it’s risk management. They’re compensating for the increased uncertainty. When they adjust their bid and ask in response to large order flow, they’re reflecting genuine supply and demand dynamics. That said, the SEC and FINRA actively investigate manipulative practices like spoofing (placing orders you intend to cancel to mislead other traders) and front-running (trading ahead of a customer’s order). Individual market makers have been fined for such violations. The system isn’t perfect, but regulatory oversight is real and ongoing.
Key Takeaway: Normal market maker activity—adjusting spreads, providing liquidity, earning the spread—is legal and essential. If you suspect manipulation in a specific stock, focus on trading liquid, well-regulated securities where oversight is strongest.
How can I improve my execution quality as a beginner?
Quick Answer: Use limit orders instead of market orders, trade liquid stocks with tight spreads, avoid placing orders during the most volatile moments (market open, news events), and consider your broker’s routing practices as your trading volume grows.
These steps reduce the spread you pay, minimize slippage, and ensure you’re not giving away unnecessary edge to market makers. For beginners, the single highest-impact change is simply switching from market orders to limit orders for entries and profit targets. As you advance, researching broker execution quality and potentially switching to a direct-access broker for active trading can produce additional savings. Track your fills against expected prices in your trading journal to measure your actual execution quality over time.
Key Takeaway: Start with limit orders and liquid stocks—those two habits alone will improve your execution quality more than any technology upgrade. Save broker optimization for when your trading volume justifies it.
Disclaimer
The information provided in this article is for educational purposes only and should not be considered financial advice. Day trading involves substantial risk and is not suitable for every investor. Past performance is not indicative of future results.
For our complete disclaimer, please visit: https://daytradingtoolkit.com/disclaimer/
Article Sources
This article was built on regulatory filings, industry white papers, and established financial education resources to ensure our explanations of market making, order routing, and payment for order flow are accurate and balanced.
- SEC / Investor.gov — Executing an Order — The Securities and Exchange Commission’s official overview of how trade orders are routed and executed, including market makers, ECNs, and internalization.
- FINRA — Order Types — The Financial Industry Regulatory Authority’s investor education on order execution, market structure, and the role of market makers in filling orders.
- Investopedia — Market Maker Definition — Industry-standard reference defining market makers, their profit mechanisms, and their role in maintaining orderly markets.
- Britannica Money — What Is a Market Maker? — Clear explanation of market makers, the NBBO, price improvement, and payment for order flow with practical examples.
- NYSE — Market Makers in Financial Markets: Their Role, How They Function — The New York Stock Exchange’s detailed white paper on market making, designated market makers, and the evolving landscape of equity market structure.
- Congressional Research Service — Payment for Order Flow (PFOF) and Broker-Dealer Regulation — Non-partisan analysis of PFOF practices, the concentration of wholesale market making, and regulatory considerations.
