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

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