Competition and Execution Quality in the Market for Retail Trading

Retail orders executed off-exchange have worse execution quality than those executed on-exchange and non-retail trades. Retail transaction costs are higher off-exchange by one basis point, increasing costs by more than one billion dollars. Using data during the Tick Size Pilot, the COVID-19 pandemic, and the NYSE floor closure, we show that retail traders benefit from increased price improvements on- but not off-exchange when liquidity providers’ rents or adverse selection risks are high. These results suggest that internalizers have market power and extract rents from retail orders. The market for retail trading is not as competitive as it could be.

Keywords: Market microstructure, Market quality, Retail trading, Trading floor, COVID-19, Tick Size Pilot, Bid-ask spreads, Price impact, Price improvement

JEL Classification: G10, G14, G18

Suggested Citation: Suggested Citation

Chung, Kee H. and Rösch, Dominik and Zhang, Yuhan, Competition and Execution Quality in the Market for Retail Trading (December 19, 2023). Available at SSRN: https://ssrn.com/abstract=4669930 or http://dx.doi.org/10.2139/ssrn.4669930