What is the practice of allowing firms to pay for order flow intended to achieve?

The practice of allowing firms to pay for order flow is intended to foster increased competition and better prices for customers. This practice involves market makers or trading firms compensating brokers for directing their clients' orders to them. By doing so, these firms can improve their liquidity and increase the number of trades they execute.

When brokerage firms receive payments for order flow, they can often provide more competitive pricing and reduced trading costs for their customers. This dynamic can lead to tighter bid-ask spreads, as market makers compete for order flow by offering better prices. As firms vie for the business of brokerage firms, this competition tends to result in improved execution quality and reduced transaction costs for retail investors.

In summary, the arrangement enhances competition in the market environment, leading to potentially better pricing options for investors while encouraging firms to innovate and offer superior services.