Trading Volume Shares and Market Quality: Pre- and Post-Zero Commissions

57 Pages Posted: 28 Jan 2021 Last revised: 15 Feb 2023

See all articles by Pankaj K. Jain

Pankaj K. Jain

University of Memphis - Fogelman College of Business and Economics

Suchi Mishra

Florida International University (FIU) - Department of Finance

Shawn O'Donoghue

Independent

Le Zhao

California State University, Fresno - Department of Finance and Business Law

Multiple version iconThere are 3 versions of this paper

Date Written: December 2, 2020

Abstract

Zero-commission brokers increasingly route orders to wholesale market makers and away from exchanges to possibly earn more PFOF in compensation for commission losses. Retail investors move assets to zero-commission brokers, whose assets increase 7%, despite investors’ awareness of possible conflicts of interest among financial intermediaries, and away from commission-charging brokers, whose assets decrease 9%. An implication of zero-commissions is that investors earn less price improvement. Retail investors submit smaller size orders, including odd lots. Surprisingly, effective spreads decline because retail limit prices are increasingly posted inside bid-ask spreads. Price impact falls and intraday volatility increases as new orders are increasingly uninformed. Realized spreads are unchanged.

Keywords: Zero Commission, Microstructure, Brokerage Competition, Retail Trading, Free stock trading

JEL Classification: D4, G12, G14, L11

Suggested Citation

Jain, Pankaj K. and Mishra, Suchismita and O'Donoghue, Shawn and Zhao, Le, Trading Volume Shares and Market Quality: Pre- and Post-Zero Commissions (December 2, 2020). Available at SSRN: https://ssrn.com/abstract=3741470 or http://dx.doi.org/10.2139/ssrn.3741470

Pankaj K. Jain

University of Memphis - Fogelman College of Business and Economics ( email )

Memphis, TN 38152
United States

Suchismita Mishra

Florida International University (FIU) - Department of Finance ( email )

University Park
11200 SW 8th Street
Miami, FL 33199
United States

Shawn O'Donoghue

Independent ( email )

Le Zhao (Contact Author)

California State University, Fresno - Department of Finance and Business Law ( email )

5245 N Backer Ave
Fresno, CA 93740
United States

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