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The NBBO putatively represents the best bid and offer price for any given stock, but it turns to not necessarily be the case. Odd lot orders—orders for fewer than 100 shares— placed inside the NBBO are exempt from the NBBO calculation.

In addition, there is dark pool liquidity which is often priced at the NBBO midpoint and also not factored in.

The second argument against PFOF is that having retail on exchange would tighten spreads. One important thing to note about PI statistics is that they assume that the NBBO spread is static, but it isn’t. In fact it’s quite likely that the spread would change with retail flow.

Since lit market market makers have to interface with statistically more toxic flow, they have to quote wider spreads to compensate for the “cost” implicit in trading with that flow. So the argument is that making lit flow less toxic would cause MMs to quote higher spreads.

The third and final argument against PFOF is that there is a data/information advantage that is conferred to MMs because they get to see retail flow first.

For example, if a MM sees retail flow directionally tilted towards selling, they will quote their bid on-exchange lower than the NBB.

This has an effect on competition in the market making industry: other MMs without this data face disproportionately higher adverse selection when their orders execute at an NBBO price which is “crumbling” or otherwise quickly changing.

And it’s worth mentioning here that this factors into why there have been so few new retail equity MMs in the last ~20 years: MMs have to work to set up these relationships with retail brokerages and create commercial arrangements to buy flow.