Retail Trading in Options and the Rise of the Big Three Wholesalers, from B. Humbert
Retail Trading in Options and the Rise of the Big Three Wholesalers
Svetlana Bryzgalova, Anna Pavlova, Taisiya Sikorskaya (London Business School)
First published: 02 October 2023
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.
We start by documenting the stylized fact that, although only a fraction of investors trade options, most of the PFOF received by retail brokerages comes from options, not equities. For example, in 2021, U.S. brokerages received $2.4 billion in PFOF for options and only $1.3 billion for equities. The lion's share of PFOF for options came from only three wholesalers: Citadel, Susquehanna, and Wolverine.