Who is Minding the Store? Order Routing and Competition in Retail Trade Execution

Xing Huang (), Philippe Jorion, Jeongmin Lee and Christopher Schwarz ()
Additional contact information
Xing Huang: https://olin.wustl.edu/faculty/xing-huang
Jeongmin Lee: https://www.federalreserve.gov/econres/jeongmin-mina-lee.htm
Christopher Schwarz: https://merage.uci.edu/research-faculty/faculty-directory/Christopher-Schwarz.html

No 2024-080, Finance and Economics Discussion Series from Board of Governors of the Federal Reserve System (U.S.)

Abstract: Using 150,000 actual trades, we study the U.S. equity retail broker-wholesaler market, focusing on brokers’ order routing and competition among wholesalers. We document substantial and persistent dispersion in execution costs across wholesalers within brokers. Despite this, many brokers hardly change their routing and even consistently send more orders to the more expensive wholesalers, although there is considerable variation among brokers. We also document a case where, after a new wholesaler enters, existing wholesalers significantly reduce their execution costs. Overall, our findings and theoretical framework highlight the heterogeneity across brokers and are inconsistent with perfect competition in this market.

Keywords: Execution quality; Retail trading; Order routing; Competition; Bid/ask spread; Market microstructure; Broker-dealers (search for similar items in EconPapers)
JEL-codes: G12 G14 G50 (search for similar items in EconPapers)
Pages: 80 p.
Date: 2024-09-20
New Economics Papers: this item is included in nep-inv and nep-mst
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Persistent link: https://EconPapers.repec.org/RePEc:fip:fedgfe:2024-80

DOI: 10.17016/FEDS.2024.080

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