What has Changed in Four Years?

Abstract

This chapter revisits the findings of Battalio, Corwin, and Jennings (2016), who used public order routing data to examine the order routing of several large retail brokerages in 4Q2012. They found that brokerages generally employed one of two order routing strategies: they appeared either to route all customer orders in a given stock to a market maker (wholesaler), or to route marketable orders to wholesalers and nonmarketable orders to exchanges that offer relatively large liquidity rebates. Importantly, the researchers also provided empirical evidence suggesting that routing orders in a manner that maximizes order flow payments can result in diminished execution quality. This chapter examines the extent to which retail broker order routing decisions and patterns have changed since 2012. It finds that despite increased public and regulatory scrutiny, the practice of routing retail orders to maximize order flow payments remains pervasive.