Some Anonymous Options Trades Are More Equal than Others

We compare retail option trade execution by placing simultaneous market orders across six brokers. Although option trades are all anonymously executed on exchanges and therefore should be treated equally, we find that execution prices vary significantly: the average round-trip execution cost ranges from 0% to 7% across brokers. Wholesalers create differential pricing by not only systematically varying execution methods, but also the pricing within each method. A primary economic driver for differential pricing seems to be payment for order flow (PFOF). However, specialists affiliated with and without PFOF-paying wholesalers provide similar pricing. Our results have market design and disclosures implications.

Keywords: retail trading, execution quality, bid/ask spread, market microstructure, payment for order flow, broker-dealers, options

JEL Classification: G12, G14, G18, G50

Suggested Citation: Suggested Citation

Huang, Xing and Jorion, Philippe and Schwarz, Christopher, Some Anonymous Options Trades Are More Equal than Others (September 10, 2024). Available at SSRN: https://ssrn.com/abstract=4951825 or http://dx.doi.org/10.2139/ssrn.4951825