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

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Event details

Date 02.12.2022 10:3012:30  
Speaker Svetlana Bryzgalova - London Business School
Location
Zoom
Category Conferences - Seminars
Event Language English

We document rapid increases in (i) retail trading in options and (ii) payment for order flow (PFOF), received by the U.S. retail brokerages from the so-called wholesalers in exchange for routing orders to them. 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.