Trading Volume Shares and Market Quality in a Zero Commission World

55 Pages Posted: 28 Jan 2021 Last revised: 7 Apr 2021

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

Florida International University (FIU) - Department of Finance

Date Written: December 2, 2020

Abstract

We study the impact of the adoption of zero commissions by major retail brokers and find that retail brokers that started charging zero commissions dramatically increase their market share of client assets. In addition, these retail brokers increasingly routed orders off exchange (i.e., OTC) to wholesale market makers instead of exchanges. Market quality improves overall. Retail brokerages no longer earn commissions and so their new economic strategy may be to sell retail order flow to wholesaler market makers and receive payment for order flow. Another important implication of zero commissions is for traders to switch to smaller order size buckets. More orders receive price improvement but its magnitude per share is smaller. In addition, effective spreads decline because retail investors that use non-marketable limit orders, are no longer constrained by commission costs and place many more small orders across the pricing grid including inside the bid-ask spread. Therefore, the prices at which liquidity-supplying orders are quoted are no longer constrained by non-zero commissions. Realized spreads, however, are unchanged suggesting that retail investors submitting liquidity-demanding orders are uninformed.

Keywords: Zero Commission, Microstructure, Brokerage Competition, Retail 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 in a Zero Commission World (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)

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

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

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