In both payment for order flow and ECN rebates, one gets paid for providing liquidity. What is the difference between payment for order flow and ECN rebates? Are ECN rebates a type of payment for order flow?
Most ECN's makes money by charging a fee for each transaction. This is a maker-taker fee arrangement where orders that provide liquidity (non marketable limit orders) receive a rebate and those who take liquidity (market orders) pay a fee.
Payment For Order Flow is a payment received by a broker for directing orders to a particular market maker who in turn benefits from trading additional volume.
An ECN is just a matchmaker and does not take any positions. They make money from the difference between charging for taking liquidity and giving rebates for those who provide liquidity. That difference is an average of about $1 per 1000 shares. This is the Tinder of trading.
In a PFOF situation an intermediary buys shares from the market really fast (or already has them in stock) and sells them to the retail client. The client gets to the market maker instead of the exchanges by being directed there by the zero-comission broker. The intermediary makes enough money off an order to pay themselves and the broker. The client gets 0 commision in turn.
This would be the equivalent of Amazon dropshipping: the best price is at the Chinese manufacturer, the market maker is the Amazon seller and the client who gets 0 commision is the Amazon buyer who gets free shipping.