In finance, nothing is illegal if the profits outweigh the fines.
Citaldel paid handsomely for order-flow information from Robinhood. They made a lot of money off retail traders. They paid a fine IIRC equivalent to a few day's profits.
If you are curious about a brokers position on PFOF you can look up their disclosures. SEC Rule 605, 606 and 615 are the search terms you want when looking these up. Fidelity has a similar disclosure on this as Vsnguard, which is that they don’t engage in PFOF except for some options markets.
Robinhood got in trouble for false advertising about PFOF not because they engaged in it, because again, PFOF is not front running and not illegal.
PFOF isn't (typically) illegal, a better word might be "controversial". There's nothing free in this life: the zero commission brokers are making it up somehow.
While the studies on how PFOF effects execution quality are varied, this summary [1] from Wharton seems fairly balanced. It's not as simple as citing NBBO and moving on.
Personally I'm suspicious of the practice mostly because of the pretty clear conflicts of interest that it creates. Again, this is controversial, but the people arguing it's ok are for the most part making money from it.
PFOF is not front running. Market making is not front running. Full stop. This fact is only controversial if you fundamentally misunderstand what market makers do.
There's a lot of confused comments on this thread. "Front running" in the strictest sense means illegal trading that involves taking advantage of trades that you know will happen and you have a responsibility not to exploit. "Front running" is also used informally to mean legally trading prior to trades that you anticipate happening. Studying the rules of an index and buy a stock just before its added to the index and index funds are required to buy it is "front running" in the second sense.
It’s pretty easy to learn how fidelity and others make money on fee-free index funds. Perhaps something to look into before accusing them of committing a crime.
Considering someone or some activity to be criminal, and accusing them of being a criminal, are two completely different things.
I consider most financial institutions to be criminal because it is always their clear intention to circumvent the spirit of the law as closely as possible. The intention is to reap the benefits of breaking the law, without the risk of consequence. When the pitchforks come, these are going to be the criminals being chased down the street.
By the same token, I do not consider a parent who writes a bad check for groceries to be a criminal.
The client generally saves money in the PFOF situation. They benefit, their broker benefits, and the market maker they deal with benefits. The only loser is the abstract rest of the market being able to get fewer penny shavings.
What in particular do you see as against the spirit of the law?
To use an absurd example just to make it incredibly obvious why what you said doesn't make sense, would that hold up if the fine if caught was $10 trillion dollars?
Then shareholders would demand executives have skin in the game and suffer if a company got the death penalty like you describe. Would likely lead to a much better world. Golden parachutes would not be a thing if shareholders got liquidated like that.
