Democratizing or Demoralizing: The Impact of Robinhood’s Order Types on Retail Trading Costs

49 Pages Posted: 7 Mar 2023

See all articles by Preston Mantel

Preston Mantel

University of Cincinnati - Department of Finance - Real Estate

Mehmet Saglam

University of Cincinnati - Department of Finance - Real Estate

Date Written: September 01, 2024

Abstract

Order collaring, which automatically converts default market orders into limit orders with a 5% spread over prior prices, has been used at Robinhood to protect retail investors from trading at unfavorable prices. However, in this paper, we provide empirical evidence that this policy actually harms retail traders by increasing their trading costs. Through quasi-experiments involving Robinhood's trading hours, their extension, the discontinuity around the 5% spread, and the asymmetric implementation of order collaring on retail buy and sell orders, we find that retail traders on Robinhood face higher spreads. Specifically, during regular trading hours, their collared orders execute at an additional spread of 4.2 basis points, and in extended hours, a significant number of their orders execute precisely at the 5% spread over closing prices. Furthermore, our analysis of the GameStop short-squeeze episode reveals that the order collaring policy is associated with extreme price movements in stocks.

Keywords: Retail Investors, Market Order Collaring, Order Anticipation, Extreme Price Movements

Suggested Citation

Mantel, Preston and Saglam, Mehmet,

Democratizing or Demoralizing: The Impact of Robinhood’s Order Types on Retail Trading Costs

(September 01, 2024). Available at SSRN: https://ssrn.com/abstract=4377192 or http://dx.doi.org/10.2139/ssrn.4377192

Preston Mantel

University of Cincinnati - Department of Finance - Real Estate ( email )

College of Business Administration
Cincinnati, OH 45221
United States

Mehmet Saglam (Contact Author)

University of Cincinnati - Department of Finance - Real Estate ( email )

Carl H. Lindner College of Business
Cincinnati, OH 45221
United States
(513) 556-9108 (Phone)

HOME PAGE: http://homepages.uc.edu/~saglammt/

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