PFOF does offer price improvement, which can effectively decrease the spread *for a particular marketable order". However, PFOF drives volume away from the limit markets, which determine the actual spread by which price improvement is measured against. So, it's a bit of a shell game.
Concretely, at least 20% of all stock market volume is internalized in PFOF-style firms (citadel, virtu, et. al). If that volume were all on the lit exchanges instead, the spread on those exchanges would be narrower on average.
PFOF does offer price improvement, which can effectively decrease the spread *for a particular marketable order". However, PFOF drives volume away from the limit markets, which determine the actual spread by which price improvement is measured against. So, it's a bit of a shell game.
Concretely, at least 20% of all stock market volume is internalized in PFOF-style firms (citadel, virtu, et. al). If that volume were all on the lit exchanges instead, the spread on those exchanges would be narrower on average.