Trading Volume Shares and Market Quality: Pre- and Post-Zero Commissions
64 Pages Posted: 28 Jan 2021 Last revised: 16 Sep 2022
Date Written: December 2, 2020
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