Asking the hard questions of modern markets

Growing up, Robert Battalio always found the experiments his father performed on lab rats fairly interesting on one level, but somehow lacking on another.

His dad, Raymond Battalio, was an economics professor at Texas A&M, and incorporated experimental approaches from science, psychology and sociology in his controlled experiments to study “spending habits” among rats. The experiments were meant to yield insights about economics in the human world — a subject the younger Battalio found fascinating.

When Battalio himself enrolled as an undergrad at Texas A&M, it looked like he might follow in his father’s footsteps. But around that time, Battalio was finally able to pinpoint what bothered him about his father’s approach to his subject matter.

Robert Battalio

“I thought experiments with rats were not very relevant to the real world,” said Battalio, professor of finance at Mendoza College of Business. “What drew me to finance was that we asked questions that had real-world implications.”

Over the course of his three-decade career so far, Battalio has had the opportunity to pursue dozens of such questions — and to make a sizable real-world impact as a result. His research has directly shaped policy debates on critical topics such as financial market fragmentation, the incentives used by U.S. security exchanges to persuade investors to use their platforms, the 2008 emergency short-selling ban (which his research showed to be ineffective) and payment for order flow.

He has served on Nasdaq’s Economic Advisory Board, Nasdaq’s Department of Economic Analysis and Nasdaq’s Quality of Markets Committee, and he has testified before both the U.S. Senate subcommittee and the Securities and Exchange Commission on equity market quality.

“In addition to being able to judge what academics find interesting, Robert is extremely good at interacting with the practicing investment community to identify topics they find worthwhile,” said Robert Jennings, professor emeritus of finance at Indiana University, who served as one of Battalio’s dissertation advisers during his doctoral program. “Robert’s work has helped separate fact from speculation.”

A Well-Timed Start

Looking back on his time as a Ph.D student in the 1990s, Battalio recognized the auspicious timing. New datasets were becoming available that made groundbreaking research in finance possible.

He recalled that the New York Stock Exchange started making data available to academics during the third year of his Ph.D. program at Indiana University in the mid-1990s.

“That allowed you to study real-time trades and quotes,” he said, “and I found that fascinating.”

This was also the era when online brokerage was emerging, changing finance and trading forever. At the time, it was controversial to suggest these changes would not harm market participants. Battalio’s dissertation tackled one of the hottest debates in both academic and professional circles: the effect of market fragmentation on market quality.

Market fragmentation refers to the idea that stocks could trade on multiple venues, not just on the exchange where they were listed. When Battalio was writing his thesis, the New York Stock Exchange had a 90% market share of trading in NYSE-listed stocks. (Today, that figure is about 15%.) The question dividing experts in the mid-1990s was whether the NYSE’s near-monopoly was good because it allowed investors to benefit from economies of scale, or bad because it allowed exchange members to make outsized profits.

“Robert was one of the first to provide empirical evidence that the fragmentation that was just beginning to occur was not harmful — and was potentially helpful — to the investors,” Jennings explained. “And that insight has been maintained over the years.”

In the course of his early work on market fragmentation, Battalio had a memorable run-in with Bernie Madoff, long before Madoff’s Ponzi scheme came to light and made headlines. Starting in the early 1990s, Madoff began pioneering a new business model in trading. Battalio’s dissertation focused on Madoff’s pioneering new model, which introduced “payment for order flow,” the arrangement in which a retail broker gets paid for the orders they route to wholesale market makers.

Before Madoff, brokers had to pay about 3 cents to execute a trade on the New York Stock Exchange. Madoff flipped the model: for certain types of customers, he would pay brokers 2 cents to route orders to him.

Battalio’s research examined whether Madoff’s payment-for-order-flow model was good or bad for markets.

“When he saw my paper, he called me in the doctoral student lounge and reamed me out,” Battalio recalled with a laugh, noting that Madoff’s reaction suggested he was already up to illegal activities and didn’t want researchers poking around.

The surprising part was, Battalio’s paper had actually concluded that Madoff’s practice was favorable for markets.

“That was counter to what everybody thought,” Battalio said. The paper became the first from his dissertation to be published. “That’s back when the online brokers started to become a thing, and what Madoff did kind of helped facilitate that. And so that’s been a recurring theme of mine over 30 years: the interaction of different business models, and how that interaction affects market participants.”

Separating Fact from Speculation

Another consistent pattern over the past decades of Battalio’s research career: he rarely shied away from a policy position on which he could play the contrarian.

In 2012, Robert Battalio testified at a Senate hearing about the rebate and incentive structures used on U.S. securities exchanges.

When the SEC imposed a temporary ban on short-selling financial stocks during the 2008 crisis, fearing the practice was driving stock prices down, Battalio’s research told a different story. His work demonstrated that the ban failed to slow the decline in financial stock prices. In fact, he and his co-authors showed, prices fell dramatically during the two weeks the ban was in effect and only stabilized when it was lifted.

In 2014, Battalio testified at a Senate hearing about the rebate and incentive structures used on U.S. securities exchanges. Specifically, the Senate subcommittee was looking to understand possible conflicts of interest between low-cost stock brokerages and ordinary investors. Research from Battalio and his co-authors had used proprietary market data to show that these conflicts did indeed present a problem.

Later, he served as the sole expert for plaintiffs in a class-action lawsuit against Barclays over its dark pool trading practices, helping secure a $25 million settlement.

Some of his most cited work concerns the payment-for-order-flow model first exemplified by Madoff that now-ubiquitous online brokers like Robinhood have proliferated. Over the years, critics and some politicians continued to characterize these payments as “bribes,” casting them in a negative light. As a result, many of Battalio’s projects have taken up the question of whether the model indeed does more harm than good. His answer has been consistent.

“Everybody says it’s bad,” Battalio said. “Our papers were among the first to say, ‘not so fast.’”

Jamie Selway, director of Trading and Markets at the SEC, credits Battalio with closing the question about whether payment for order flow is indeed a problem.

“Robert has done definitive work on payment for order flow and its economic rationale,” Selway said. “That was something that was debated in a pretty lively way, certainly 25 years ago. I think sensible people consider that a settled question now, largely because of Robert.”

Most recently, Battalio served as an expert witness in the 2024 trial of Archegos founder Bill Hwang, who secretly amassed massive positions in stocks through accounts at multiple investment banks.

“I was brought in to show they were trading in a way that amplified their impact on stock prices,” Battalio said. “To sit in front of jurors and explain these topics so that 12 of my peers can understand — that was pretty cool.”

The Data Advantage

The Hwang trial exemplifies how Battalio creatively manages one of the most important aspects of his work: securing proprietary access to important datasets.

“Interesting datasets drive what people study,” he notes. “And throughout my career, I’ve been very successful at getting datasets nobody else has.”

In the Hwang case, lawyers provided him with all the data generated from Hwang’s trading algorithms, a particularly valuable (and difficult-to-access) insight for any finance researcher.

His focus on the importance of data acquisition has been a constant throughout his career. (It was another privately secured dataset that undergirded the research project that got Battalio invited to testify before the Senate subcommittee in 2014.) One of his main strategies, he said, was to create win-win scenarios with data providers.

It’s this practical, data-driven approach that made Battalio so valuable to both industry actors and regulators alike.

“He’s a truth seeker,” said Selway. “It’s well known in the industry that if Battalio takes up a question, you pay attention. There will almost certainly be an impact because when he engages a question, the answer tends to be pretty definitive.”