Institutional Liquidity Demand and the Internalization of Retail Order Flow: The Tail Does Not Wag the Dog

Yashar H. Barardehi, Dan Bernhardt, Zhi Da and Mitch Mitch Warachka
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Yashar H. Barardehi: Argyros School of Business & Economics, Chapman University and the U.S. Securities and Exchange Commission
Zhi Da: Mendoza College of Business, University of Notre Dame
Mitch Mitch Warachka: Argyros School of Business & Economics, Chapman University

The Warwick Economics Research Paper Series (TWERPS) from University of Warwick, Department of Economics

Abstract: The decision of wholesalers to internalize retail order flow primarily reflects institutional liquidity demand. We first use the Tick Size Pilot to highlight this decision’s influence on the retail trade imbalances denoted Mroib by Boehmer et al. (2021). We then show that wholesalers internalize more retail order flow when institutional demand is higher, leading Mroib to be inversely related to institutional order flow. Intraday returns move in the same direction as institutional price pressure but the opposite direction of Mroib. Moreover, |Mroib| is highest when institutional trading costs are highest. Distant future returns display strong ∪-shaped patterns conditional on Mroib, consistent with a permanent liquidity premium driving the positive relation between these returns and the magnitude of |Mroib|.

Keywords: Retail Trade; Institutional Trade; Payment for Order Flow; Liquidity; Microstructure (search for similar items in EconPapers)
Date: 2022
New Economics Papers: this item is included in nep-mst
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Citations: View citations in EconPapers (3)

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Persistent link: https://EconPapers.repec.org/RePEc:wrk:warwec:1394

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