Finance and Economics Discussion Series (FEDS)
September 2024
Who is Minding the Store? Order Routing and Competition in Retail Trade Execution
Xing Huang, Philippe Jorion, Jeongmin Lee, and Christopher Schwarz
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.
DOI: https://doi.org/10.17016/FEDS.2024.080
PDF: Full Paper
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