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

See all articles by Robert H. Battalio

Robert H. Battalio

University of Notre Dame - Department of Finance

Todd Griffith

Utah State University

Robert A. Van Ness

University of Mississippi - Department of Finance

Date Written: November 15, 2016

Abstract

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

Battalio, Robert H. and Griffith, Todd and Van Ness, Robert A., Do (Should) Brokers Route Standing Limit Orders Seeking to Trade U.S. Equity Options to Wholesalers? (November 15, 2016). 12th Annual Mid-Atlantic Research Conference in Finance (MARC). Available at SSRN: https://ssrn.com/abstract=2870000 or http://dx.doi.org/10.2139/ssrn.2870000

Robert H. Battalio

University of Notre Dame - Department of Finance ( email )

P.O. Box 399
Notre Dame, IN 46556-0399
United States
574-631-9428 (Phone)
574-631-5255 (Fax)

Todd Griffith

Utah State University ( email )

Logan, UT 84322
United States
4357979098 (Phone)

Robert A. Van Ness (Contact Author)

University of Mississippi - Department of Finance ( email )

Oxford, MS 38677
United States

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