Seeing/selling order flow is a term of art in finance. Seeing order flow refers to the ability to trade against customer orders. Selling order flow is getting paid by someone else for the ability to trade against customer orders.
Imagine that a stock is bid at $100.00 and offered at $100.01. Assume that market makers estimate the fair price to be $100.005 unconditionally.
A customer sends a marketable buy limit order at $100.01.
If this hits the exchange then the person who's offering at $100.01 will make $0.005.
If the order flow gets sold (i.e. someone gets to see the flow before it hits the exchange) then the internalizer can fill it at $100.01 and make the $0.005 themselves instead of letting someone else on the exchange do it. It has nothing to do with front running or even information.
This is really valuable because you're not competing for speed with other market participants and you expect the customer flow to be uninformed so the trade is less likely to move against you before you trade out.
This is a problem for market structure because it discourages people from quoting on the exchange.
So the market maker who pays for order flow data takes the spread. But how are they able to trade with the buyer at $100.01 when there are limit asks on the book already at that price? Seems they need to cut the line?
That's part of thr reason that they pay for the flow. They're able to sell at $100.01 off exchange even if there was someone else who was willing to sell at $100.01 on the exchange first.
This also why I think payment for order flow is bad even if the first order effects are not bad for Robinhood customers under reasonable assumptions.
Imagine that a stock is bid at $100.00 and offered at $100.01. Assume that market makers estimate the fair price to be $100.005 unconditionally.
A customer sends a marketable buy limit order at $100.01.
If this hits the exchange then the person who's offering at $100.01 will make $0.005.
If the order flow gets sold (i.e. someone gets to see the flow before it hits the exchange) then the internalizer can fill it at $100.01 and make the $0.005 themselves instead of letting someone else on the exchange do it. It has nothing to do with front running or even information.
This is really valuable because you're not competing for speed with other market participants and you expect the customer flow to be uninformed so the trade is less likely to move against you before you trade out.
This is a problem for market structure because it discourages people from quoting on the exchange.