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Trading volume shares and market quality: Pre- and post- zero commissions

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  • Jain, Pankaj K.
  • Mishra, Suchismita
  • O'Donoghue, Shawn M.
  • Zhao, Le

Abstract

After the adoption of zero-commissions by major brokers, they increasingly route orders to wholesale market makers to possibly earn payment for order flow given the loss of commissions. Retail investors assets held by zero-commission and commission-charging brokers increase 7 % and decrease 9 %, respectively. Retail investors earn less price improvement per share and submit more orders and smaller orders. Effective spreads decline because retail limit prices are increasingly posted within the bid-ask spread. Intraday volatility increases and price impact falls, as orders become more uninformed, while realized spreads remain unchanged.

Suggested Citation

  • Jain, Pankaj K. & Mishra, Suchismita & O'Donoghue, Shawn M. & Zhao, Le, 2024. "Trading volume shares and market quality: Pre- and post- zero commissions," Journal of Empirical Finance, Elsevier, vol. 79(C).
    • Handle: RePEc:eee:empfin:v:79:y:2024:i:c:s0927539824000987
    DOI: 10.1016/j.jempfin.2024.101564
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    More about this item

    Keywords

    Wholesale market makers; Commissions; Brokers; Retail trading; Payment for order flow; and short squeeze;
    All these keywords.

    JEL classification:

    • D4 - Microeconomics - - Market Structure, Pricing, and Design
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading
    • L11 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Production, Pricing, and Market Structure; Size Distribution of Firms

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