Payment for Order Flow and Options Promotion

Retail investors have greatly increased their options trading volume, raising questions about whether higher payment-for-order-flow (PFOF) rates that brokerages receive from option trades are linked with increased brokerage options promotion. In this paper, I conduct an empirical study to explore the association between options PFOF rates and promotion across four brokerages: Robinhood, Webull, E*TRADE, and Charles Schwab. Utilizing their SEC Rule 606(a) reports and social media posts from X, Facebook, and Instagram, I calculate a monthly average options PFOF rate for each brokerage and construct an options promotion strength score through a hand-coded framework. I find that Robinhood and E*TRADE initially display a statistically significant association, and Charles Schwab joins them when a one-month lag is introduced. However, when controlling for market-wide options activity through OCC equity options volume, no brokerage has a statistically significant association with their average options PFOF rate, and Robinhood displays statistical significance with the OCC equity options volume; this may partly be attributed to overcontrolling if market-wide options activity is a downstream effect of options promotion. Lastly, when excluding E*TRADE and Charles Schwab's transition months following acquisitions, neither brokerage displays a statistically significant association. Collectively, the evidence suggests heterogeneity among brokerages, with Robinhood showing the clearest association between options PFOF and promotion strength. The results have implications on regulation surrounding best-interest obligations and options disclosures, especially as more retail investors enter the market.