Do (Should) Brokers Route Standing Limit Orders Seeking to Trade U.S. Equity Options to Wholesalers?
57 Pages Posted: 16 Nov 2016 Last revised: 8 Jun 2017
Date Written: November 15, 2016
Brokers who route both market and limit orders to wholesalers are generally paid less for their orders than brokers who bifurcate their order flow. Since nonmarketable limit orders have priority over wholesalers at a price, limit orders routed to wholesalers may experience enhanced execution quality by having the opportunity to provide liquidity to uninformed retail orders. We first present evidence that several national retail brokers bifurcate their options order flow: they route most of their market orders to wholesalers and most of their limit orders to exchanges with high take fees and liquidity rebates. Next, using a recent decision by the Philadelphia Stock Exchange to alter the manner in which options trades are arranged, we provide empirical evidence that brokers can enhance limit order execution quality by routing all of their customer orders to wholesalers.
Keywords: Maker-Taker, Payment-For-Order-Flow, Order Execution Quality
JEL Classification: G10
Suggested Citation: Suggested Citation