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The Option Trader’s Hedge Fund: A Business Framework for Trading Equity and Index Options by Mark Sebastian, Dennis A. Chen

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13. Lessons from the Trading Floor on Trading and Execution

What Everybody Should Know About Payment for Order Flow

Mark Sebastian wrote the following in his OptionPit.com blog on 12/20/2009:

When I first began trading in 2001, a market making firm, let’s call it Firm XYZ, came up with a new and innovative idea to bring option volume to the Pits where they controlled the most volume, the Pits where they were the Specialist, or the Designated Primary Market-Maker or DPM.

This was called payment for order flow. The exchanges call them “marketing fees” and your broker may call it one of many names.

What seemed like a bright idea at the time has blossomed into a situation that is

• Bad for the customer

• Bad for the liquidity provider

• GREAT for ...

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