This paper examines how the design of retail trading venues impacts execution outcomes for retail investors. Venues with competing market makers charge significantly lower effective spreads (4.2 bps and 4.8 bps) than a single market maker venue (9.1 bps). Venues, where market makers have price improvement obligations, perform better when market makers fully execute orders. Without full execution, investors are better off trading on venues where market makers are obligated to guarantee execution even if they do not provide price improvement. Retail brokers’ strategic use of venues with competing market makers reduces effective spreads, especially when quoted spreads are wide.

This paper uses regulatory data to assess the value of retail order flow in the German equity market. To this end, we examine the performance of specialized retail market makers (RMMs) that internalize a large share of retail activity via affiliated trading venues. We show that retail market making is extremely profitable, with an average (gross) Sharpe ratio of 17.85, which is more than twice as large as that earned by proprietary trading firms (PTFs) active in public limit order markets. A simple calculation suggest that RMMs would be willing to give up around 60% of their revenues, or 1.76 bps of their trading volume, for access to retail order flow. The profitability of retail market making is rooted in reduced exposure to adverse selection and inventory risk.

U.S. retail brokers route order flow to wholesalers based on their past performance. Brokers face a strategic choice over how often to reallocate order flow, how aggressively to reward or punish performance, and what history, across time or securities, to consider. This paper analyzes how broker choices for allocating order flow shape competition among wholesalers. Our empirical results are consistent with the theory that prospects for future order flow provide wholesalers with strong incentives to offer price improvement and allow brokers to discipline the provision of liquidity.