Dr. Svetlana Bryzgalova, Assistant Professor of Finance at the London Business School, delivered a keynote on the evolving landscape of retail investing and the implications of payment for order flow (PFOF) at the Inquire Europe Spring Seminar 2025 in Brussels. Drawing on empirical asset pricing, econometrics, and machine learning, her research sheds light on the shifting dynamics of market microstructure and retail behavior.
Bryzgalova opened by revisiting the 2021 GameStop short squeeze, using it as a springboard to discuss broader changes in market access. “The thing that fueled the change in investor landscape was the so-called democratization of investing—pioneered by Robinhood through zero-commission trading,” she noted. This innovation attracted “millions of young and unsophisticated yet technically savvy investors” into the market, many of whom were engaging with stocks, cryptocurrencies, and especially options.
A key enabler of zero-commission platforms is payment for order flow (PFOF)—a system in which brokers route orders to wholesalers, who internalize trades and pay the brokers for the flow. “Retail order flow is the best there is,” Bryzgalova emphasized. “It’s less informed, largely balanced—even during the GameStop frenzy, order flow was 50/50 buy and sell.” Market makers, she explained, “pocket the spread,” making retail flow “hugely profitable to internalize.”
Despite its benefits, PFOF raises structural concerns. “It fragments order flow and may distort price discovery,” she warned, noting that the best bid-ask spreads used as benchmarks may already be affected by the absence of retail orders on public exchanges. While the U.S. allows PFOF and provides transparency through Form 606 and FINRA reports, “Germany is the only other developed country where this practice remains legal—for now.” In contrast, PFOF is banned in the UK, Canada, Australia, and most of the EU.
Highlighting the profitability of this system, Bryzgalova referenced research from German regulators estimating a Sharpe ratio of 17 for wholesalers executing retail trades—”two times larger than what a typical proprietary trading firm or hedge fund could report.”
The discussion then turned to options trading, which she described as an underappreciated area of retail activity. “Two-thirds of payment for order flow revenues come from options, not stocks,” she revealed—despite the fact that “no one even mentioned options during the three-hour Congressional hearing on GameStop.”
Most retail options trades, she noted, are short-dated, high-leverage calls: “They look like lottery tickets.” These contracts often expire worthless, yet are “offered by default on most platforms” and typically come with “bid-ask spreads of 10% or more.” During the pandemic, retail investors lost over $2 billion trading such contracts. “Yes, it’s cheaper than going to Las Vegas,” she said, “but the losses are real.”
To better understand this activity, Bryzgalova and co-authors developed a new approach to identify retail trades in options, using auction data linked to price improvement flags. This method provides cleaner insight than the often-used “small trades” heuristic, which she criticized as “very, very noisy,” and frequently contaminated by institutional activity.
Her talk closed with a look at platform nudging and behavioral design: “Retail platforms reward you for trading more—fireworks, badges, congratulatory messages. As if constant trading is necessarily good.” She warned that such gamification may fuel overtrading and risk-seeking behavior, especially in derivative markets.
Yet she also cautioned against caricaturing retail investors. “There’s a lot of heterogeneity,” she emphasized. While many are inexperienced, a growing group of “pro-tail” investors—sophisticated individuals who behave like professional traders—has emerged.
Key point : “Retail investors have become a force you have to reckon with.” Their growing presence, especially in derivatives markets, has implications for regulators, asset managers, and market structure alike. Bryzgalova concluded by calling for improved data transparency, regulatory oversight, and tools to empower and protect retail participants: “There’s still a lot we don’t know—but what’s clear is that this market segment is here to stay.”
View the research in full via : https://www.inquire-europe.org/event/joint-spring-seminar-2025-brussels/