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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.


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