Trading Volume Shares and Market Quality: Pre- and Post-Zero Commissions

We find that major retail brokers that eliminate commissions dramatically increase their market share of client assets. Using broker’s SEC Rule 606 reports, we find they increasingly routed orders to off-exchange wholesale market makers instead of exchanges to gain more payment for order flow and to be compensated for the loss of commission revenues. Consequently, wholesale market makers’ volume increases relative to exchanges. In the retail brokers’ trade-off between payment for order flow versus price improvement, retail investors receive less price improvement per share. Zero commissions traders switch to odd lots and smaller order size buckets. Overall market quality improves. Effective spreads decline because retail investors post many more standing orders inside the bid-ask spread. Realized spreads are unchanged but intraday volatility increases suggesting that the new orders are relatively uninformed.