Who Saves with a Savings Plan – Investors or Market Makers? An Execution Quality Analysis of Savings Plan Orders

Who Saves with a Savings Plan – Investors or Market Makers? An Execution Quality Analysis of Savings Plan Orders

We study how market makers price predictable, uninformed order flow, which allows the isolation of inventory costs from adverse selection. Retail savings plans (SPs) provide a unique laboratory for this analysis, as their pre-determined nature eliminates adverse selection risk. Using proprietary data from LS Exchange, a major European retail venue with a single market maker, we develop a novel methodology to identify SP trades and benchmark their execution prices against the reference market Xetra. While overall execution quality is high, we find that the market maker extracts small, systematic rents. For ETFs, the dominant SP asset class, execution is paradoxically worse than for similar in size non-SP trades, with the market maker charging a size-independent premium of approximately one basis point. Contrary to theory, this premium cannot be meaningfully explained by inventory risk. Our results show that even in the absence of adverse selection, market makers price predictable order flow distinctly worse than discretionary trades, challenging classic models of spread components and further motivating regulatory discussions regarding payment for order flow.