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



Publishing details

Social Sciences Research Network

Authors / Editors

Bryzgalova S;Pavlova A;Sikorskaya T


Publication Year



We document rapid increases in (i) retail trading in options and (ii) payment for order flow, received by the U.S. retail brokerages from the so-called wholesalers in exchange for routing orders to them. Exploiting new flags in transaction-level data, we isolate wholesaler trades and build a novel proxy for retail options trading. Often cash-constrained, retail investors prefer cheaper, lottery-like weekly options, with the average bid-ask spread of a whopping 12.6%. They lose money on average and participate in frenzies. The inflow of retail investors also coincides with an increase in call options left suboptimally unexercised. Arbitrageurs exploit these investor mistakes via so-called “dividend play” trades, producing (virtually) riskless arbitrage profits. Puzzlingly, they forgo 50% of these profits, leaving money on the table for option writers.


Retail; Payment for order flow; Dividend play; Suboptimal option exercise; Market concentration; Arbitrage; FinTech; WallStreetBets


Social Sciences Research Network

Available on ECCH


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