Why Did Retail Liquidity Programs Fail?

41 Pages Posted: 5 Apr 2024

See all articles by Thomas Ernst

Thomas Ernst

University of Maryland - Robert H Smith School of Business

Chester S. Spatt

Carnegie Mellon University - David A. Tepper School of Business

Jian Sun

Lee Kong Chian School of Business, Singapore Management University

Date Written: March 5, 2024

Abstract

Five U.S. exchanges have Retail Liquidity Programs, which operate a limit order book only accessible to market orders from retail traders. In theory, this allows competition for segmented retail order flow. In practice, volumes executed in RLPs have been very low, and obtain prices inferior to those offered by off-exchange wholesalers. We trace this failure to three distinct issues: (1) cream-skimming by wholesalers, so that ``retail'' trades in RLPs carry high adverse selection risk, (2) an inability by RLPs to display quotes without pre-trade transparency of available prices, and (3) a lack of trade-through protection, with wholesalers executing trades at prices worse than those offered by RLPs. As the SEC continues to consider new reforms for retail equity trading, RLPs offer critical insight into possible channels of competition for retail trades.

Keywords: Microstructure, Retail Trading, RLP, Exchanges, SEC

JEL Classification: G14, G18, G20

Suggested Citation

Ernst, Thomas and Spatt, Chester S. and Sun, Jian, Why Did Retail Liquidity Programs Fail? (March 5, 2024). Available at SSRN: https://ssrn.com/abstract=4749232 or http://dx.doi.org/10.2139/ssrn.4749232

Thomas Ernst (Contact Author)

University of Maryland - Robert H Smith School of Business ( email )

Robert H. Smith School of Business
Van Munching Hall
College Park, MD 20742
United States

Chester S. Spatt

Carnegie Mellon University - David A. Tepper School of Business ( email )

5000 Forbes Avenue
Pittsburgh, PA 15213-3890
United States
412-268-8834 (Phone)
412-268-6689 (Fax)

Jian Sun

Lee Kong Chian School of Business, Singapore Management University ( email )

Li Ka Shing Library
70 Stamford Road
Singapore 178901, 178899
Singapore

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