The first is what's known as payment for order flow. The wholesalers often use their own capital to fill trades, meaning individuals end up buying from, and selling to, these firms. Wholesalers make money by purchasing shares from some customers at one price while selling to others at a higher price, benefiting from the price spread. That is legal. But if a particular wholesaler wasn't the best place to send an order to begin with, the execution may well be suspect, critics say.
Wholesalers shell out a lot of money to buy orders from online brokerages.
Payment for order flow and internalization are most prevalent in Nasdaq stocks, but also are commonplace in New York Stock Exchange stocks. Even some people on Wall Street are troubled by payment for order flow. Online brokerages counter that it doesn't matter where orders are sent because all firms are required by market regulation to execute orders at the best quoted price. The system is the equivalent of a retailer being required to match the best deal quoted by a competitor. Rather, market makers should work to find better prices for customers, critics say.