Publication Type
Working Paper
Version
publishedVersion
Publication Date
4-2024
Abstract
Five U.S. exchanges have Retail Liquidity Programs, which operate a limit order book only accessible to market orders from retail traders. In theory, this allows competition for segmented retail order flow. In practice, volumes executed in RLPs have been very low, and obtain prices inferior to those offered by off-exchange wholesalers. We trace this failure to three distinct issues: (1) cream-skimming by wholesalers, so that ``retail'' trades in RLPs carry high adverse selection risk, (2) an inability by RLPs to display quotes without pre-trade transparency of available prices, and (3) a lack of trade-through protection, with wholesalers executing trades at prices worse than those offered by RLPs. As the SEC continues to consider new reforms for retail equity trading, RLPs offer critical insight into possible channels of competition for retail trades.
Discipline
Finance and Financial Management
Research Areas
Finance
First Page
1
Last Page
41
Identifier
https://papers.ssrn.com/sol3/papers.cfm?abstract_id=4749232
Publisher
SSRN
Citation
ERNST, Thomas; SPATT, Chester; and SUN, Jian.
Why did retail liquidity programs fail?. (2024). 1-41.
Available at: https://ink.library.smu.edu.sg/lkcsb_research/7659
Creative Commons License
This work is licensed under a Creative Commons Attribution-NonCommercial-No Derivative Works 4.0 International License.
