Internalized Retail Order Imbalances and Institutional Liquidity Demand

72 Pages Posted: 18 Nov 2021 Last revised: 22 Dec 2023

See all articles by Yashar H. Barardehi

Yashar H. Barardehi

Chapman University - The George L. Argyros School of Business & Economics; U.S. Securities and Exchange Commission

Dan Bernhardt

University of Illinois at Urbana-Champaign - Department of Economics

Zhi Da

University of Notre Dame - Mendoza College of Business

Mitch Warachka

Chapman University - The George L. Argyros School of Business & Economics

Date Written: November 18, 2021

Abstract

Using their exclusive access to retail order flow, wholesalers internalize unequal amounts of retail buy and sell orders to provide liquidity to institutional investors. Shocks to revenues/costs of internalization reveal that wholesaler choices determine observable internalized retail-trade imbalances. Large imbalances signify scarce institutional liquidity, manifested in high institutional trading costs. Consistent with internalized orders providing liquidity rather than being informed, intraday returns move in the same direction as institutional trading but the opposite direction of retail trade imbalances reflecting wholesalers intermediating between retail and institutional investors. The subsequent unwinding of institutional price pressure underlies the positive return predictability of imbalances.

Keywords: Retail Trade, Institutional Trade, Payment for Order Flow, Internalization, Liquidity, Microstructure

JEL Classification: G12, G14

Suggested Citation

Barardehi, Yashar and Bernhardt, Dan and Da, Zhi and Warachka, Mitch, Internalized Retail Order Imbalances and Institutional Liquidity Demand (November 18, 2021). Available at SSRN: https://ssrn.com/abstract=3966059 or http://dx.doi.org/10.2139/ssrn.3966059

Yashar Barardehi (Contact Author)

Chapman University - The George L. Argyros School of Business & Economics ( email )

333 N. Glassell
Orange, CA 92866
United States

HOME PAGE: http://sites.google.com/site/barardehi/

U.S. Securities and Exchange Commission ( email )

Dan Bernhardt

University of Illinois at Urbana-Champaign - Department of Economics ( email )

1206 South Sixth Street
Champaign, IL 61820
United States
217-244-5708 (Phone)

Zhi Da

University of Notre Dame - Mendoza College of Business ( email )

Notre Dame, IN 46556-5646
United States

Mitch Warachka

Chapman University - The George L. Argyros School of Business & Economics ( email )

333 N. Glassell
Orange, CA 92866
United States

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