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.