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

Journal

Journal of Finance

Subject

Finance

Publishing details

Journal of Finance 2023 Vol 78:6 p 3465-3514

Authors / Editors

Bryzgalova S;Pavlova A;Sikorskaya T

Biographies

Anna Pavlova Svetlana Bryzgalova

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


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