Payment for Order Flow And Option Internalization

UNIVERSITY OF TECHNOLOGY SYDNEY
Finance Department
Research Seminars in Finance

Thomas

Paper Title: Payment for Order Flow And Option Internalization

Speaker: Thomas Ernst, University of Maryland

Time and Date: 12:00-1:00 pm, Wednesday 13 September 2023 (Australian Eastern Standard Time)

Venue: Face-to-face seminar in room CB08.08.002, Level 8, Building 8, University of Technology Sydney, 14-28 Ultimo Rd, Ultimo, Sydney, Australia (Map of campus)

Abstract: We investigate execution quality and payment-for-order-flow (PFOF) in the options market. Option trades generate high PFOF. While all option trades execute on-exchange, option exchange rules facilitate internalization by retail wholesalers. We exploit variation in designated market maker (DMM) assignments, minimum tick size, and auction allocation rules, showing that option internalization is imperfectly competitive. These imperfectly competitive rules protect option market maker profits, and allow market makers to pay high prices for retail option order flow.

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Co-ordinator: Kenny Phua

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