EconPapers    
Economics at your fingertips  
 

Payment for Order Flow And Asset Choice

Thomas Ernst and Chester S. Spatt

No 29883, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: The paper documents important differences in payment for order flow (PFOF), spreads, and price improvement across asset classes. In stocks we show that PFOF is small. While many retail trades are executed off-exchange, we find that they receive meaningful price improvement, particularly when spreads are at their minimum. In single-name equity options, we show that PFOF is large. While all option trades are executed on-exchange, option exchanges have rules that facilitate internalization. We exploit variation in the Designated Market Maker (DMM) assignments at option exchanges to show that retail traders receive less price improvement, and worse prices, from those DMMs who pay PFOF to brokers. Current debate concerning PFOF has focused on equity routing. We show that option routing is comparatively worse, and this gives rise to a second potential conflict of interest of brokers: encouraging customers to trade assets offering higher PFOF. As fintech has eliminated retail commissions, these cross-asset differences in PFOF have become far more consequential to broker incentives.

JEL-codes: G1 G12 G13 G18 (search for similar items in EconPapers)
Date: 2022-03
New Economics Papers: this item is included in nep-mst
Note: AP
References: Add references at CitEc
Citations: Track citations by RSS feed

Downloads: (external link)
http://www.nber.org/papers/w29883.pdf (application/pdf)

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:nbr:nberwo:29883

Ordering information: This working paper can be ordered from
http://www.nber.org/papers/w29883

Access Statistics for this paper

More papers in NBER Working Papers from National Bureau of Economic Research, Inc National Bureau of Economic Research, 1050 Massachusetts Avenue Cambridge, MA 02138, U.S.A.. Contact information at EDIRC.
Bibliographic data for series maintained by ().

 
Page updated 2023-09-03
Handle: RePEc:nbr:nberwo:29883