Study Details Payment for Order Flow Impact on Equity Purchase Prices

A study entitled, “The “Actual Retail Price” of Equity Trades” co-authored by several academic researchers highlights the impact payment for order flow (PFOF) has on the execution price and quality for retail investors with brokerage accounts. For the study, the authors opened individual accounts at six brokerage firms, some of which accept PFOF while some do not. Then they selected 128 stocks and placed orders at different brokers that were identical in execution type, size, and submission time. The study found “very large variations in “actual retail price” execution across brokers” but noted that PFOF is “not the primary driver of differences in price execution.”  The authors conclude the disparity in pricing is due to “off-exchange wholesalers systematically giving different execution prices for the same trades to different brokers.” The authors state the current disclosure environment under Reg NMS does not provide sufficient information for retail investors to identify discrepancies. To address the price discrepancy between trades, the study suggests changes to the scope of reports brokers submit on execution statistics.

Click here to read the study “The “Actual Retail Price” of Equity Trades.”