Person A places a trade which ends up executing at a certain time that causes the person to lose money.
Person B places a trade, then there’s some breaking news about the COVID vaccines and the market fluctuates, and then the trade is executed. Person B makes more money than expected because it took longer for the trade to execute and there was time for the market to change.
I see. I assumed that order flow implied something about timing (i.e. we send these orders to this broker who executes the order in an untimely fashion causing an inferior execution price).
It's more like this: the NBBO bid for a stock may be $10.00, which is effectively a worst-case for "best execution", which is what a broker is obligated to provide if I place a market sell order.
The broker may be able to route order that to a venue that will execute at $10.05; this is potential price improvement for the seller.
The potential price improvement is split between the broker and the customer. This is what "payment for order flow" really means. The broker routes the order to a particular trading venue in exchange for a cut of the potential price improvement, with the rest going to the customer.
What's worth knowing about Robinhood is a) they did not disclose that they were being paid for order flow and b) that they contracted to receive a much larger cut of the potential price improvement than was typical; e.g. other brokers might take $0.01 of that improvement, whereas Robinhood was taking $0.04.
Person B places a trade, then there’s some breaking news about the COVID vaccines and the market fluctuates, and then the trade is executed. Person B makes more money than expected because it took longer for the trade to execute and there was time for the market to change.