Presenter: Svetlana Bryzgalova, London Business School

Title: Retail Trading in Options and the Rise of the Big Three Wholesalers

Abstract: We document rapid increases in (i) retail trading in options and (ii) payment for order flow (PFOF), received by the U.S. retail brokerages from the so-called wholesalers in exchange for routing orders to them. 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.

Host: Olga Balakina