That would be bad for the retail investor. PFOF tightens the spreads and increases speed of execution.
PFOF does offer price improvement, which can effectively decrease the spread *for a particular marketable order". However, PFOF drives volume away from the limit markets, which determine the actual spread by which price improvement is measured against. So, it's a bit of a shell game.
Concretely, at least 20% of all stock market volume is internalized in PFOF-style firms (citadel, virtu, et. al). If that volume were all on the lit exchanges instead, the spread on those exchanges would be narrower on average.
> PFOF does not tighten "lit" spreads.
But that's fine right? This whole debate is about whether retail traders are being benefiting or losing (on net) from this. For the retail trader, the price improvement they get via PFOF is probably much better than the slightly better spreads they'll get on lit exchanges if PFOF was banned.
No, because as other comments have mentioned, retail orders are generally "non-toxic" and "uninformed", which allows market makers to quote tighter spreads while still maintaining profit.
PFOF price improvement might be hundredths of a cent (per-share) off of a 3-cent lit spread. But, if PFOF were banned and all that volume were lit instead, the lit spread might actually be 2 cents, so you'd be saving $0.005 in this universe compared to the one we live in.
1. considering that retail volume dwarfs institutional volume[1]. Therefore I find it unlikely that there will be that much price improvement on lit exchanges.
2. part of the payment for order flow goes towards making trading free for retail traders. Even if I'm getting $0.005 better prices, that would be eaten up by the $5-$10 trade commissions I'd have to pay.
[1] https://markets.businessinsider.com/news/stocks/retail-inves...