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

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: 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