Identical market orders placed across six brokers averaged 3.9% round-trip frictions relative to position size, ranging from about 0% (Vanguard) to 7% (Robinhood) and rising with payment for order flow (~7,000 trades; 18 stocks/ETFs; Mar–Jun 2024).
How consequential are trading frictions for equity options, and how do these frictions vary across brokers? In their September 2024 paper entitled "Some Anonymous Options Trades Are More Equal than Others", Xing Huang, Philippe Jorion and Christopher Schwarz compare retail option trade executions by placing the same orders across six brokers: E*Trade, Fidelity, Robinhood, Schwab, TD Ameritrade (now Schwab) and Vanguard. These brokers use some or all of the same five wholesalers, but their payments for order flow (PFOF) vary: two brokers receive no PFOF (Vanguard and Fidelity), while the other four receive PFOF at different levels. The authors place intraday market orders at the six brokers that are identical in symbol, strike, expiration, number of contracts, direction (buy or sell) and submission time. They then compare execution prices, measuring performance relative to matched National Best Bid and Offer (NBBO) quotes. Using results from about 7,000 trades in 18 stocks/ETFs that represent 45% of U.S. equity option market volume during mid-March 2024 through June 2024, they find that:
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