Retail Order Execution Quality under Zero Commissions

45 Pages Posted: 18 Mar 2021

See all articles by Samuel Adams

Samuel Adams

University of Tennessee, Knoxville - Department of Finance

Connor Kasten

University of Tennessee, Knoxville - Department of Finance

Date Written: January 7, 2021

Abstract

Using rule 605 reports from major market makers that receive retail order flow, we examine the impact of zero-commission trades on order execution quality. We find that the effective spread for marketable orders between 100 and 499 shares marginally decreased following the zero-commission cut. We also find that realized spreads increased and adverse selection decreased for market makers relative to exchanges. Consistent with better alignment of incentives between brokers and market makers, our results suggest that the elimination of commissions for retail investors improved execution quality for orders directed to third-party market makers.

Keywords: Retail Investors, Commissions, Execution Quality, Market Makers, 605

JEL Classification: G10, G12, G14, G24

Suggested Citation

Adams, Samuel and Kasten, Connor, Retail Order Execution Quality under Zero Commissions (January 7, 2021). Available at SSRN: https://ssrn.com/abstract=3779474 or http://dx.doi.org/10.2139/ssrn.3779474

Samuel Adams

University of Tennessee, Knoxville - Department of Finance ( email )

Knoxville, TN 37996
United States

Connor Kasten (Contact Author)

University of Tennessee, Knoxville - Department of Finance ( email )

Knoxville, TN 37996
United States

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