Trading Volume Shares and Market Quality: Pre- and Post-Zero Commissions

64 Pages Posted: 28 Jan 2021 Last revised: 16 Sep 2022

See all articles by Pankaj K. Jain

Pankaj K. Jain

University of Memphis - Fogelman College of Business and Economics

Suchi Mishra

Florida International University (FIU) - Department of Finance

Shawn O'Donoghue

Independent

Le Zhao

California State University, Fresno - Department of Finance and Business Law

Date Written: December 2, 2020

Abstract

Zero-commission brokers increasingly route orders to wholesale market makers and away from exchanges to earn more PFOF in compensation for commission losses. Many retail investors move assets to zero-commission brokers despite awareness of potential conflict of interest. Given the trade-off between PFOF and price improvement, investors earn less price improvement per share. Retail investors submit more orders of smaller size, including odd lots. Surprisingly, effective spreads decline because retail limit prices are increasingly posted inside bid-ask spreads. Price impact falls and intraday volatility increases, which suggests that new orders are increasingly uninformed. Realized spreads are unchanged despite less adverse selection.

Keywords: Zero Commission, Microstructure, Brokerage Competition, Retail Trading, Free stock trading

JEL Classification: D4, G12, G14, L11

Suggested Citation

Jain, Pankaj K. and Mishra, Suchismita and O'Donoghue, Shawn and Zhao, Le, Trading Volume Shares and Market Quality: Pre- and Post-Zero Commissions (December 2, 2020). Available at SSRN: https://ssrn.com/abstract=3741470 or http://dx.doi.org/10.2139/ssrn.3741470

Pankaj K. Jain

University of Memphis - Fogelman College of Business and Economics ( email )

Memphis, TN 38152
United States

Suchismita Mishra

Florida International University (FIU) - Department of Finance ( email )

University Park
11200 SW 8th Street
Miami, FL 33199
United States

Shawn O'Donoghue

Independent ( email )

Le Zhao (Contact Author)

California State University, Fresno - Department of Finance and Business Law ( email )

5245 N Backer Ave
Fresno, CA 93740
United States

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