For firms that receive payment for order flow (“PFOF”), the economics are usually governed by a broker rate card, meaning the broker's schedule of payment terms. Those terms can vary based on factors such as order type, trading session, price range, and other execution characteristics.
The business question is simple: is the firm being paid what it expects, and is there a measurable opportunity to improve that result? In practice, answering that question is difficult because the outcome is distributed across numerous fills, various payment categories and a changing daily trading mix.
STEP 1
The client used its existing broker payment terms to build a current view within Knowtice's PFOF tool of expected payment for order flow.
STEP 2
Once the current baseline was established, the client used hypothetical rate cards within Knowtice's PFOF tool to test how different payment structures would affect the same underlying trading activity.
STEP 3
Within Knowtice's PFOF tool, the analysis is available at more than one level.
STEP 4
Using Knowtice's PFOF tool, the client tested various rate-card alternatives to quantify the likely effect of proposed changes to its current rate-card. On that basis, the client communicated to the executing broker the desired revisions with the knowledge of what revisions were most important and where non-material concessions could be offered. The executing broker acquiesced to those revisions.
After the revised rate became effective, the results became apparent within the first month. Although the client's trading volume stayed the same as compared to the previous month, the PFOF revenue increased materially.
One scenario with broader changes to non-core trading periods produced a smaller modeled increase (8% on a representative tracked sample day).
Another scenario that changed the economics of core non-marketable and sub-dollar flow produced the larger modeled increase (~15% on that same sample basis). That gave the client a more specific basis for broker discussions because it identified which categories appeared to have the greatest economic impact.
That distinction also mattered during negotiation. Not every category moved in the same direction. Some rate-card categories were reduced, while others improved.
In the end, the value of Knowtice’s PFOF tool was that it allowed the client to evaluate the full net effect rather than focusing on any one category in isolation. In other words, the client could determine whether concessions in one area were meaningfully offset by gains in other areas before deciding whether the revised rate card was economically favorable overall.
