Wholesaler Execution Quality

We obtain a proprietary data set of all marketable orders routed to one or more wholesalers in May 2022 to study wholesaler execution quality. Contrary to conventional wisdom, external liquidity is used to fill 28.6% of the shares in our sample. We find that order size, both absolute and relative to book depth, and recent order imbalance are associated with the decision to source external liquidity. Using a new benchmark, we find the value of both price and size improvement provided to sample orders is 6.5 times greater than the value of price improvement as measured by mandatory monthly Rule 605 reports. Our results indicate that price improvement is not the only measure that should be used when evaluating the relative benefits of the current market structure to alternatives. This paper was accepted by Agostino Capponi, finance. Supplemental Material: The data files are available at https://doi.org/10.1287/mnsc.2023.04156 .