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Let's say RH sends your order to Citadel Securities in exchange for PFOF. What does CitSec do with it? If this were equities, they could match the order with an offsetting one in its inventory and send it directly to the DTCC for clearing. Options work a bit different.

The SEC mandates that every options order be executed on exchange before going to the OCC for clearing. Wholesalers legally can't circumvent the exchange despite paying for all the order flow. This creates a peculiar competitive dynamic.

How do exchanges make wholesalers happy? They create their own form of PFOF. On-exchange MMs are charged "marketing fees" which are then pooled & rebated to the wholesalers in exchange for flow. On-exchange firms subsidize wholesaler order flow.

There are other ways wholesalers exert power over the exchanges. Let's revisit your Robinhood order routed through CitSec. Imagine CitSec chooses CBOE to execute its order. CitSec enters the market and says "I've got an order that needs filling, who can give me the best price?"

What happens next is called a "price improvement auction". MMs will compete to win the auction by offering a price at or better than the NBBO. CitSec has a separate entity that will compete w/ other MMs for the order. Order by order competition? That's great! Well… not quite.

Because CitSec is the wholesaler their on-exchange affiliate has an advantage over other MMs. Exchanges charge them 1/10th the fees as a reward for bringing the order to their exchange. With 10x the fee hurdle, many MMs can't compete.

There's also the specialist angle to consider. Exchanges choose MMs to act as a specialist for each traded stock. Specialists have higher quoting obligations & in return get even more order flow exclusivity. Who are the top specialists? You guessed it - the top wholesalers.