The Retail Execution Quality Landscape
Fisher College of Business Working Paper No. 2022-03-014
Charles A. Dice Working Paper No. 2022-14
63 Pages Posted: 27 Dec 2022 Last revised: 22 Dec 2023
Date Written: December 10, 2022
Abstract
We show that off-exchange (wholesaler) executions provide significant trading cost savings to retail investors. Despite industry concentration, three findings suggest that wholesalers do not abuse market power. First, brokers closely monitor and reward wholesalers offering low liquidity costs with more order flow. Second, the largest wholesalers offer the lowest costs due to economies of scale. Finally, the entry of a new large wholesaler does not reduce liquidity costs. Drawing from these insights, we discuss the implications of two proposed alternatives to the status quo: (i) pooling retail and institutional flows on exchanges and (ii) sending retail flow to order-by-order auctions.
Keywords: Retail Trading, Wholesalers, Execution Quality
JEL Classification: G20; G24; G28
Suggested Citation: Suggested Citation