Abstract: 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.
Xueyong Zhang, Central University of Finance and Economics
Deqing Zhou, Central University of Finance and Economics
Abstract: We analyze a dynamic model of a monopolistic insider who receives private information sequentially and faces a post-trading disclosure requirement. We show that characterizing the equilibrium in this trading game is isomorphic to solving a consumption-saving problem with a borrowing constraint. Analogous to the ``consumption-smoothing’’ intuition in the consumption-saving literature, the insider in our trading game ``smooths’’ his information usage over time given the dynamics of his private information. The insider would ``dissimulate'' his private information through mixed strategies if and only if sufficient information arrives early. Finally, we analyze the interpretation of mixed strategies and the value of commitment.
Discussant: Michael Brolley, Wilfrid Laurier University
Abstract: Gamification of stock trading is a novel practice by brokers to incorporate game-like features to increase clients’ engagement with trading. This study examines how the market reacts to the introduction of 142 gamification features in the mobile trading apps of 17 major U.S. brokers. I find that the gamification of trading can be viewed as a double-edged sword. It alters and worsens retail traders’ strategy by reducing their returns and increasing return volatility. However, it also reduces costs and risks for liquidity providers by making retail order flow less toxic, leading to a positive effect for the rest of the market.
