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

RePEc Short ID: pjo72
ORCID iD: 0000-0002-6727-7827

Huang, Xing; Jorion, Philippe; Lee, Jeongmin; Schwarz, Christopher

doi:10.17016/FEDS.2024.080

Working Paper

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

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.

Keywords: Execution quality; Retail trading; Order routing; Competition; Bid/ask spread; Market microstructure; Broker-dealers;

JEL Classification: G50; G12; G14;

https://doi.org/10.17016/FEDS.2024.080