Retail Order Execution Quality under Zero Commissions

Abstract

Using rule 605 reports from major market makers that receive retail order flow, we examine the impact of zero-commission trades on order execution quality. We find that the effective spread for marketable orders between 100 and 499 shares marginally decreased following the zero-commission cut. We also find that realized spreads increased and adverse selection decreased for market makers relative to exchanges. Consistent with better alignment of incentives between brokers and market makers, our results suggest that the elimination of commissions for retail investors improved execution quality for orders directed to third-party market makers.