Retail Trading in Options and the Rise of the Big Three Wholesalers

Svetlana Bryzgalova, Anna Pavlova and Taisiya Sikorskaya

No 17688, CEPR Discussion Papers from C.E.P.R. Discussion Papers

Abstract: We document a rapid increase in retail trading in options in the U.S. Facilitated by payment for order flow (PFOF) from wholesalers executing retail orders, retail trading recently reached over 60% of the total market volume. Nearly 90% of PFOF comes from three wholesalers. Exploiting new flags in transaction-level data, we isolate wholesaler trades and build a novel measure of retail options trading. Our measure comoves with equity-based retail activity proxies and drops significantly during U.S. brokerage platform outages and trading restrictions. Retail investors prefer cheaper, weekly options, with the average bid-ask spread of a whopping 12.6%, and lose money on average.

Keywords: Retail (search for similar items in EconPapers)
JEL-codes: D45 G11 G12 G4 G5 (search for similar items in EconPapers)
Date: 2022-11
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