The Retail Execution Quality Landscape

Fisher College of Business Working Paper No. 2022-03-014

Charles A. Dice Working Paper No. 2022-14

47 Pages Posted: 27 Dec 2022 Last revised: 29 Dec 2022

See all articles by Anne Haubo Dyhrberg

Anne Haubo Dyhrberg

Wilfrid Laurier University - Lazaridis School of Business and Economics

Andriy Shkilko

Wilfrid Laurier University - Lazaridis School of Business and Economics

Ingrid M. Werner

The Ohio State University - Fisher College of Business

Date Written: December 12, 2022

Abstract

Market observers criticize the practice of retail brokers routing retail orders to wholesalers and argue that retail flow should execute on exchanges. Using comprehensive data, we show that both wholesalers and exchanges have characteristics beneficial for retail orders. Wholesalers provide substantial (significantly beyond de minimis) price improvement, while exchanges offer lower liquidity costs (realized spreads). On balance, price improvement dominates, and wholesaler intermediation saves retail investors close to a billion dollars per month. Three characteristics of the market for retail order flow are inconsistent with wholesaler market power. First, retail brokers reward wholesalers that offer lower liquidity costs with more order flow. Second, the largest two wholesalers charge the lowest liquidity costs. Third, neither a new wholesaler entry nor an increase in retail broker bargaining power reduces liquidity costs charged by wholesalers.

Keywords: Retail Trading, Wholesalers, Execution Quality

JEL Classification: G20; G24; G28

Suggested Citation

Dyhrberg, Anne Haubo and Shkilko, Andriy and Werner, Ingrid M., The Retail Execution Quality Landscape (December 12, 2022). Fisher College of Business Working Paper No. 2022-03-014, Charles A. Dice Working Paper No. 2022-14, Available at SSRN: https://ssrn.com/abstract=4313095 or http://dx.doi.org/10.2139/ssrn.4313095

Anne Haubo Dyhrberg

Wilfrid Laurier University - Lazaridis School of Business and Economics ( email )

75 University Ave W
waterloo, ontario N2L 3C5
Canada

Andriy Shkilko

Wilfrid Laurier University - Lazaridis School of Business and Economics ( email )

LH 4050
75 University Ave. W.
Waterloo, Ontario N2L3C5
Canada
519.884.0710 ext. 2462 (Phone)
519.884.0201 (Fax)

Ingrid M. Werner (Contact Author)

The Ohio State University - Fisher College of Business ( email )

2100 Neil Avenue
Columbus, OH 43210-1144
United States
614-292-6460 (Phone)
614-292-2418 (Fax)

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