Retail Trading in Options and the Rise of the Big Three Wholesalers
Journal
Journal of Finance
Subject
Finance
Publishing details
Authors / Editors
Bryzgalova S; Pavlova A; Sikorskaya T
Biographies
Publication Year
2023
Abstract
We document a rapid increase in retail trading in options in the United States. Facilitated by payment for order flow (PFOF) from wholesalers executing retail orders, retail trading recently reached over 60% of total market volume. 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 average bid-ask spread of 12.6%, and lose money on average.
Available on ECCH
No
