Working Paper: CEPR ID: DP17688
Authors: Svetlana Bryzgalova; Anna Pavlova; Taisiya Sikorskaya
Abstract: We document a rapid increase in retail trading in options in the U.S. Facilitated by payment for order flow (PFOF) from wholesalers executing retail orders, retail trading recently reached over 60% of the 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 the average bid-ask spread of a whopping 12.6%, and lose money on average.
Keywords: Retail; Payment for Order Flow; Internalization; WallStreetBets; Rule 606 Reports; Price Improvement; Auctions
JEL Codes: G4; G5; G11; G12; D45
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| payment for order flow (PFOF) practices (G35) | retail trading in options (G13) |
| retail trading activity proxies (L81) | retail trading (L81) |
| trading performance analysis (F17) | retail trades lose money (L81) |
| observed patterns of retail trading behavior (G41) | speculative motives (D84) |
| retail investors preference for call options (G40) | retail trading behavior (L81) |
| trading restrictions (F14) | retail trading share (L81) |
| broker platform outages (G24) | retail trading activity (L81) |