FINANCE
Te “Actual Retail Price” of Equity Trades Te Journal of Finance, 80, 5, October 2025 LINK TO PAPER
XING HUANG ASSOCIATE PROFESSOR
Charles H. Dyson School of Applied Economics and Management
Cornell SC Johnson College of Business Cornell University
Co-authors • Xing Huang
Associate Professor, Charles H. Dyson School of Applied Economics and Management, Cornell SC Johnson College of Business, Cornell University
• Christopher Schwarz, Merage School of Business, University of California at Irvine • Brad Barber, Graduate School of Management, University of California at Davis • Philippe Jorion, Merage School of Business, University of California at Irvine • Terrance Odean, Haas School of Business, University of California at Berkeley
Summary Zero commissions have transformed the landscape for retail investors, bring-
ing seemingly affordable equity trading to the masses. Robinhood started this “democratization” with commission-free trading in 2015. All other major retail brokers began to follow suit in late 2019. One of the factors that made remov- ing commissions possible is an offsetting revenue stream—payment for order flow (PFOF)—whereby off-exchange venues pay brokers to route retail orders to them. However, PFOF has raised concerns about potential conflicts of interest between brokers and retail investors. An essential question is whether higher PFOF is associated with lower quality of execution. Investors should know that “no-commission” trading does not mean “free” trading. Even with zero commissions, trading systematically generates costs due to the usual gap between buying and selling prices, that is, the effective bid-ask spread. Te issue is whether these trading costs are systematically higher in the presence of PFOF.
Te authors compare execution quality of six brokerage accounts across five brokers by generating a sample of 85,000 simultaneous market orders. Commission levels and PFOF differ across accounts. Tey find that execution prices vary significantly across brokers: the mean account-level round-trip cost ranges from 0.07% to 0.46%, excluding any commissions. Te dispersion is due to off-exchange wholesalers systematically giving different execution prices for the same trades to different brokers. Across brokers, variation in PFOF does not explain the large variation in price execution. Tey provide several suggestions for more informative disclosures on execution quality.
CONTENTS TO MAIN
| RESEARCH WITH IMPACT: CORNELL SC JOHNSON COLLEGE OF BUSINESS • 2025 EDITION
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