Anatomy of Trading Costs for Retail Investors: Savings from Off-Exchange Execution

Abstract

Using both public and proprietary order execution data, we show that retail trades executed by wholesalers outside typical exchanges receive significantly more favorable prices, on average, than comparable trades executed on exchanges. Contrary to the claim that brokers sacrifice execution quality for payment for order flow (PFOF), trades executed via Robinhood, a high PFOF broker, receive better-than-average prices. Additional analysis shows this advantageous pricing arises because retail orders exhibit lower levels of adverse selection, and yields no evidence market power drives up retail trading costs. Our estimates and conclusions differ from related research because we analyze a broader sample and weight observations by dollar volume rather than equally. Overall, the zero-commission PFOF model for executing retail trades has lowered total costs below 6bp –- far smaller than they were previously.