Graduation Year


Date of Submission


Document Type

Campus Only Senior Thesis

Degree Name

Bachelor of Arts



Reader 1

Ben Gillen

Reader 2

Mike Izbicki

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© 2022 Kieran B Daly


Payment for order flow is a market microstructure that has come about from designated market makers taking advantage of advances in technology and relaxations of an old SEC rule. PFOF has provided multiple benefits to US investors such as zero commission trading and faster, more efficient order execution. These benefits have come at a cost because most of the savings from designated market makers (DMMs) is taken by the brokerage that sells the order flow to market makers. On top of that, zero commission trading’s widespread adoption has been accompanied by a rise in more risky speculative activity.

To study the effects of PFOF on the financial markets, we examined the SEC rules that paved the way for its widespread implementation. Using SEC MIDAS data and CBOE options volume data we regress trend variables against market efficiency (cancels-to-trades ratio) and volume. We find that there is statistical and economic significance for the monthly average options volume (in number of contracts) for before the first SEC rule change, between the two rule changes, and after the second rule change. We also had similarly significant findings in ETF volume (number of trade messages) before the first rule change and between the two rule changes, and for stock market efficiency between the two rule changes and after the second rule change.

The change in ETF volume could come from commission-free trading that is made possible by PFOF. More long-term investors are able to invest without being penalized with a fixed commission fee. The changes in options volume and stock market efficiency seem to be coming from market makers going through a transition period. The amendments to SEC Rule 98 changed the market-making landscape and allowed for more consolidation in the market-making business. It is likely that the market makers adjusted their firm architecture to adapt to these changes and were finished when a few made large acquisitions near the second amendment to Rule 98.

This thesis is restricted to the Claremont Colleges current faculty, students, and staff.