TD Ameritrade Holding Corp. (NYSE:AMTD) revealed its order-routing revenue was $236 million in 2013, up from $184 million in 2012, according to a report in the Wall Street Journal.

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TD Ameritrade ‘s payment for order flow

Independent analysis shows just how dependent the firm is on what is considered payment for order flow. With TD Ameritrade Holding Corp. (NYSE:AMTD)’s net revenue of $752 million in 2013, at first glance payment for order flow provided TD Ameritrade over 30 percent of its revenue. This is a consistent percentage with other firms.  The CME Group Inc (NASDAQ:CME), for instance, generates anywhere from 30 percent to 40 percent of its revenue off the highly profitable practice.

Payment for order flow is a recent phenomenon and does not have the same direct costs associated with it as do other divisional expenses in a brokerage firm. Commissions, for instance, have a significant degree of human labor associated with their burden.  While some in accounting add overall overhead on top of the payment for order flow numbers, the fact is payment for order flow is among the brokerage firm’s most significant business factor.

It is this payment for order flow that is the subject of regulatory ire, particularly as it was a generally undisclosed payment.  If a mid level brokerage executive were to accept payment for order flow from a mutual fund, for instance, it would lead to significant regulatory punishment.

SEC investigation HFT firms relation with exchanges

The SEC is investigating the relationships between exchanges and if high frequency trading firms are being sold preferential market access.

TD Ameritrade Holding Corp. (NYSE:AMTD), the largest US online brokerage firm by volume, is known to sell their trading volume to Citadel, a Chicago-based hedge fund.  Citadel operates a “closed pool,” meaning that access to the pool by other market makers is restricted.  This leaves Citadel and their internal high frequency trading / market making regime to primarily benefit from the TD Ameritrade order flow.

“There exist today comprehensive regulations and oversight, disclosure and industry competition, as well as the many checks and balances we have implemented over the years, to ensure that we remain focused on satisfying our obligation to seek best execution on behalf of our clients,” Chief Executive Fred Tomczyk said in the report.

The brokerage firm is appearing before a Senate subcommittee this Tuesday to testify on market structure and high frequency trading related issues.