Does Retail Order Flow Internalization Increase Information Acquisition? Solo-authored (2023) Latest Version (April 2025)
Abstract: Order flow internalization by wholesalers has increased in the last decade. Retail order internalization decreases liquidity in lit exchanges, but it may also favor liquidity provision to sophisticated investors. Consequently, their incentives to acquire information will be affected, and this has consequences for price informativeness and market efficiency. We measure short and long term information acquisition and find that the proportion of internalized volume is positively associated with information acquisition at both horizons. We test whether wholesalers use internalized retail order flow to provide liquidity to sophisticated investors, showing that the positive effect of internalization on information acquisition is stronger for those stocks preferred by active institutional investors during earnings surprises. Finally, we use the retail trading boom that started in late 2019 as an exogenous shock to internalization to address causality and the analysis supports our previous results.
Presented at: Universidad de Salamanca (2024), Summer School in Market Microstructure (2024, Stockholm), 7th FutFinInfo Conference at INSEAD (Poster, scheduled 2025), 32nd Finance Forum and its PhD Mentoring Day (scheduled 2025).
ETFs Mispricing and Wholesalers as Authorized Participants Solo-authored (2025) Draft coming soon!
Abstract: Exchange-Traded Funds (ETFs) pricing relies on keeping their share prices aligned with their net asset value. This is achieved through arbitrage with the creation and redemption of ETF units by authorized participants in the primary market. In this paper, we investigate whether wholesaler internalizers' activity in the ETF primary market as authorized participants affects fund mispricing. Wholesalers face lower trading costs since they can access retail order flow that can be internalized, which constitutes a competitive advantage with respect to other authorized participants. We find that wholesalers' primary market arbitrage activity decreases mispricing, helping ETF share prices to remain aligned with their net asset value, especially when there is negative mispricing. We also find that the percentage of ETF units created and redeemed and the changes in ETF holdings are associated with the internalization of ETFs and their constituent stocks included in their creation and redemption baskets.
