Price jump intensity is predictable using simple order book depth statistics. We examine the relationship between liquidity fragmentation, consolidated depth, and stock price jumps for S&P 500 stocks. Using a stylized model, we posit that liquidity suppliers fragment offered liquidity and reduce depth to manage adverse selection risk on days with high expected jump intensity. Consistent with our model’s predictions, we find 80% (19%) more jumps when fragmentation (depth) increases (decreases). The findings suggest that market makers anticipate volatility and the associated adverse selection cost, providing traders with advance warning.

Wholesale market makers pay for retail options orders that must be executed on exchanges. Payment for order flow (PFOF) wholesalers compete via price improvement in exchange auctions. To attract retail orders, wholesalers run more auctions when their recent price improvement has been lower. However, auction price improvement lowers market maker revenues. Wholesalers earn revenues to pay PFOF in nonauction trades where their designated market maker status increases their execution priority. While some auctions produce substantial price improvement, most do not have multiple bidders offering meaningful price improvement. Overall, options market structure better promotes competition in auctions than in nonauctions.