Using a comprehensive multi-year U.S. dataset, we show that off-exchange (wholesaler) executions tend to benefit retail investors by separating their flow from the more toxic non-retail flow. Although the wholesale industry is concentrated, three findings suggest that wholesalers may not abuse market power. Firstly, brokers reward wholesalers who offer lower liquidity costs with more order flow. Secondly, the largest wholesalers offer the lowest costs, due to economies of scale. Finally, the entry of a new large wholesaler does not result in a reduction of liquidity costs.

We investigate differences in execution quality and payment-for-order-flow (PFOF) across asset classes. In equities, retail trades receive meaningful price improvement, particularly in tick-constrained stocks, and PFOF is small. In single-name equity options, problematic market structures lead to worse retail price improvement, and PFOF is large. While all option trades execute on-exchange, option exchange rules facilitate internalization. We exploit variation in designated-market-maker (DMM) assignments, minimum tick size, and auction allocation rules, showing that option internalization is imperfectly competitive. Option market structure gives rise to a second potential incentive conflict of brokers: encouraging customers to trade assets offering higher PFOF.

We investigate the effects of market fragmentation on price impact. Using a newly launched exchange as a quasi-natural experiment, we find that an exogenous increase in market fragmentation leads to a higher price impact of equity trading in the primary U.S. equity exchanges. Our IV estimates suggest a 1.6% increase in market fragmentation of a stock will induce approximately 2.9 bps increases in NBBO-based price impact and much more significant increases in exchange-based price impact for trading that stock. We attribute the increases in price impact to both the mechanical channel and the informational channel. Our results are providing supportive evidence to the recent theories such as Chen and Duffie (2021) that the introduction of a new lit exchange changes the landscape of trading in a multi-market setting, therefore leading to an increase in the price impact of trading.