Do (Should) Brokers Route Standing Limit Orders Seeking to Trade U.S. Equity Options to Wholesalers

Exchange competition across U.S. options exchanges facilitates the tailoring and frequent modification of fees to attract particular order flow. We examine whether the maker-taker model or the payment for order flow (PFOF) model offers superior limit order execution quality. On the PHLX exchange, a set of select option classes recently changed pricing models from maker-taker to PFOF. We conduct difference-in-difference tests that suggest that options on stocks that change fee structures exhibit an improvement in limit order execution quality, including an increase in order fill rates, a decrease in order cancellation rates, and faster fills. We do, however, find that limit order volume, in terms of the number of orders submitted, declines following the change to PFOF pricing. Thus, our results seem to suggest that limit order traders on the PHLX exchange are made better off following the change in select options classes from maker-taker to PFOF.