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

Abstract

Zero-commission brokers increasingly route orders to wholesale market makers and away from exchanges to possibly earn more PFOF in compensation for commission losses. Retail investors move assets to zero-commission brokers, whose assets increase 7%, despite investors’ awareness of possible conflicts of interest among financial intermediaries, and away from commission-charging brokers, whose assets decrease 9%. An implication of zero-commissions is that investors earn less price improvement. Retail investors submit smaller size orders, 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 as new orders are increasingly uninformed. Realized spreads are unchanged.

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

JEL Classification: D4, G12, G14, L11