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

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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.

Suggested Citation

  • Xing Huang & Philippe Jorion & Jeongmin Lee & Christopher Schwarz, 2024. "Who is Minding the Store? Order Routing and Competition in Retail Trade Execution," Finance and Economics Discussion Series 2024-080, Board of Governors of the Federal Reserve System (U.S.).
    • Handle: RePEc:fip:fedgfe:2024-80
    DOI: 10.17016/FEDS.2024.080
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    More about this item

    Keywords

    Execution quality; Retail trading; Order routing; Competition; Bid/ask spread; Market microstructure; Broker-dealers;
    All these keywords.

    JEL classification:

    • G50 - Financial Economics - - Household Finance - - - General
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading

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