Best Execution and Order Flow

[rukawa]

Every time there is a discussion of the relative merits of Interactive Brokers the subject of best execution comes up. And sometimes people will talk about the fact that most discount brokers sell order flow to HFT's. And that IB is worth it because you will save more on execution costs than you will pay in fees. My question is what does all this mean? What is the NBBO? What is order flow? What is best execution? Can anyone give an example of best execution on IB vs a discount broker for a limit order? And similarly for a market order?

 

What order of magnitude would the difference be on a trade of lets say $10000

[Hielko]

With IB you will in general pay less in fees. Period.

 

And while this is from IB itself, so question is how reliable it is, they say that on average you gain $0.05 per 100 shares traded. https://www.interactivebrokers.com/en/index.php?f=1340

 

I think the lower fees are way more important than the better trade execution. If you buy 100 shares at $100 for you $10K transaction you pay something like $0.70 if you are taking liquidity and less if you add liquidity (sometimes you actually get paid). Most other (cheap) brokers charge $5+ for that. But it depends on what you exactly buy. Not everything is cheaper with IB. Especially stuff like buying a million penny stocks etc.

[WneverLOSE]

Most of the customers of IB are more of a traders than buy and hold investors so for them execution is important since buying at 10 and selling at 10.01 at the end of the day makes you about 44% in a year, if you bought at 10.001 and sold at 10.009 you would make an annualized return of 33.8%.

 

basically the more you trade the better you have great execution. if you invest like me and buy or sell only a few times a year this won't matter much but for some types of investors / traders it does.

 

IB greatest edge is its wide array of markets, low commissions, very good execution VERY LOW rates to borrow money and from a business side they plan on becoming the underlying infrastructure for most other brokers.

 

I like them, they don't mess around with you, no hidden fees for reports, support , order change and stuff like that that used to cost me thousands of dollars with my previous broker.

[bobp]

I don't know what best execution means any more.

 

Example: A stock was 10 to 10.02. I offer 2000 at 10.01 and my order shows, so it's 10 - 10.01 now.

I cancel my offering and with the the stock back to 10 - 10.02, I hit the 10 bid with my 2000.

I sell it at 3 different prices averaging higher than 10.01 which is where I offered originally. This is all in a 2 minute span in a completely inactive stock, a spac.

 

The fragmenting of markets with dark pools and who knows what else has made it impossible to know the real market. Maybe with another broker I would have gotten a different execution. Better or worse I don't think I'll ever know, and I doubt you can trust any broker's statistics on best execution. I could be wrong as I don't understand any of this any longer. I use etrade btw.

[boilermaker75]

I don't know what best execution means any more.

 

Example: A stock was 10 to 10.02. I offer 2000 at 10.01 and my order shows, so it's 10 - 10.01 now.

I cancel my offering and with the the stock back to 10 - 10.02, I hit the 10 bid with my 2000.

I sell it at 3 different prices averaging higher than 10.01 which is where I offered originally. This is all in a 2 minute span in a completely inactive stock, a spac.

 

The fragmenting of markets with dark pools and who knows what else has made it impossible to know the real market. Maybe with another broker I would have gotten a different execution. Better or worse I don't think I'll ever know, and I doubt you can trust any broker's statistics on best execution. I could be wrong as I don't understand any of this any longer. I use etrade btw.

 

This is just anecdotal, since I haven't kept track. But when I put in limit orders I much more often get execution at better prices with IB than I do at Schwab.

[Hielko]

Isn't that always the case? Unless you are a huge customer at multiple brokers you can never get enough data to know where you get the best execution. That's why you need a 3rd party audit. They can compare all the transactions to the NBBO at that point in time, and calculate how much (if any) price improvement people get.

[KCLarkin]

The fragmenting of markets with dark pools and who knows what else has made it impossible to know the real market.

 

Not an expert on market structure but I think this is why IBKR gives you better executions than retail brokerages. They actually try to route you to the best exchange, including dark pools. Retail brokerages are bribed to send trades to a specific exchange.

 

If the market is quoting 1.00(bid) x 1.05(ask) (spreads aren't usually this wide but just using as an example), I will generally get very close to the ask on a retail brokerage. On IBKR, I get closer to the midpoint. Especially with options.

 

This is all anecdotal, since there is really no way to tell if you get good execution. Did you get a better price because the market moved by the time your order hit the exchange? This is why retail brokerages can earn so much from selling order flow. Retail clients can't even tell they are getting screwed. But you can actually "feel" the difference in execution. Even though it might only be a fraction of a penny per share, it really does feel like night and day between IBKR and the retail brokerages I use (TD, Scotia, BMO). Not sure if US brokers are any better.

 

But if you are only trading $10k, you can safely ignore execution. There are exceptions, illiquid options for example. But otherwise, this is not worth worrying about as long as you use limit orders. The retail brokerages provide good value for small retail clients.

[bobp]

"Did you get a better price because the market moved by the time your order hit the exchange?"

My example was a spac that doesn't trade. What doesn't make sense is that they wouldn't pay 10.01 when I was offered there but paid higher when I removed my offering and the spread was 2 cents. It could be fees from taking my offering, I don't know.

Bottom line is it doesn't matter much to me what's happening, although I appreciate your response. I do think the markets have gotten really screwed up because of fees, routing, dark pools etc.

 

But, commissions get lower and lower and spreads get tighter so I guess it's ok.

[muscleman]

What do you guys think of Merrill Edge? It offers a lot of free trades per month, and it is one of the few brokers who do not sell order flow.

 

https://www.stockbrokers.com/guides/order-execution

 

Does it place orders directly into the exchanges?

[stahleyp]

I use IB and Merrill Edge. I have money at Merrill Edge primary for the free trades and credit card promotions (mostly for credit cards since I don't trade a lot). Their travel card gives you 2.625% cash back when bonus is used for travel and their reward card gives 5.25% on gas, 3.5% on groceries/Costco and 1.75% on anything else (you need $100,000+ to get those higher bonus levels otherwise it's less cash back). Merrill Edge's website isn't great but it's better than IB.  They also gave me a little bit of cash to move money over. All in all, I'm satisfied.

[TwoCitiesCapital]

The fragmenting of markets with dark pools and who knows what else has made it impossible to know the real market.

 

Not an expert on market structure but I think this is why IBKR gives you better executions than retail brokerages. They actually try to route you to the best exchange, including dark pools. Retail brokerages are bribed to send trades to a specific exchange.

 

If the market is quoting 1.00(bid) x 1.05(ask) (spreads aren't usually this wide but just using as an example), I will generally get very close to the ask on a retail brokerage. On IBKR, I get closer to the midpoint. Especially with options.

 

This is all anecdotal, since there is really no way to tell if you get good execution. Did you get a better price because the market moved by the time your order hit the exchange? This is why retail brokerages can earn so much from selling order flow. Retail clients can't even tell they are getting screwed. But you can actually "feel" the difference in execution. Even though it might only be a fraction of a penny per share, it really does feel like night and day between IBKR and the retail brokerages I use (TD, Scotia, BMO). Not sure if US brokers are any better.

 

But if you are only trading $10k, you can safely ignore execution. There are exceptions, illiquid options for example. But otherwise, this is not worth worrying about as long as you use limit orders. The retail brokerages provide good value for small retail clients.

 

This has been my experience as well. Not only are commissions significantly lower for both equities and options (I've been paid to trade and most commissions come out to be less than $2-$3), but orders get filled on IB that don't get filled at Scottrade. I keep the Scottrade account because I like that they reinvest dividends for free (into any equity that I like), but I've had multiple times where I've put in orders both in my Scottrade Account and my IB account and they'll fill, and for better prices, than in my Scottrade account which often doesn't fill at all.

[muscleman]

I am weighing IB, Merrill Edge and TD Ameritrade. Could anyone share some thoughts?

 

I've been using IB, but I really hate their customer service.

Merrill Edge and TD seem to have better customer service.

 

ME routes orders to exchanges like IB, while TD uses Knight Capital and Citadel to execution trades and gets order flow rebates.

 

ME is obviously the cheapest here, and TD is expensive.

 

What do you guys think of order execution quality for TD vs ME vs IB?

 

 

Thank you!

[boilermaker75]

Isn't that always the case? Unless you are a huge customer at multiple brokers you can never get enough data to know where you get the best execution. That's why you need a 3rd party audit. They can compare all the transactions to the NBBO at that point in time, and calculate how much (if any) price improvement people get.

 

If you are addressing this comment to me, I thought of something else I encounter occasionally. For example, let's say the bid and ask are 10.00 and 10.10. I will put in a limit order of 10.05 at Schwab and nothing will happen. I  then put in the same order at IB and it will execute. I go back and my Schwab order is still sitting there. This has happened often enough I have no doubt execution is better at IB than at Schwab.

[muscleman]

Isn't that always the case? Unless you are a huge customer at multiple brokers you can never get enough data to know where you get the best execution. That's why you need a 3rd party audit. They can compare all the transactions to the NBBO at that point in time, and calculate how much (if any) price improvement people get.

 

If you are addressing this comment to me, I thought of something else I encounter occasionally. For example, let's say the bid and ask are 10.00 and 10.10. I will put in a limit order of 10.05 at Schwab and nothing will happen. I  then put in the same order at IB and it will execute. I go back and my Schwab order is still sitting there. This has happened often enough I have no doubt execution is better at IB than at Schwab.

 

Have you checked which exchange filled your order in these cases?

 

[boilermaker75]

Isn't that always the case? Unless you are a huge customer at multiple brokers you can never get enough data to know where you get the best execution. That's why you need a 3rd party audit. They can compare all the transactions to the NBBO at that point in time, and calculate how much (if any) price improvement people get.

 

If you are addressing this comment to me, I thought of something else I encounter occasionally. For example, let's say the bid and ask are 10.00 and 10.10. I will put in a limit order of 10.05 at Schwab and nothing will happen. I  then put in the same order at IB and it will execute. I go back and my Schwab order is still sitting there. This has happened often enough I have no doubt execution is better at IB than at Schwab.

 

Have you checked which exchange filled your order in these cases?

 

I have not.

[maybe4less]

I am weighing IB, Merrill Edge and TD Ameritrade. Could anyone share some thoughts?

 

I've been using IB, but I really hate their customer service.

Merrill Edge and TD seem to have better customer service.

 

ME routes orders to exchanges like IB, while TD uses Knight Capital and Citadel to execution trades and gets order flow rebates.

 

ME is obviously the cheapest here, and TD is expensive.

 

What do you guys think of order execution quality for TD vs ME vs IB?

 

 

Thank you!

 

I don't know about TD, but my (anecdotal) experience has been that order execution is best at IB, a little worse at ML, and worse again at Schwab, Scottrade, and Fidelity. Presumably TD is also in that last category.

[rukawa]

So my takeaways:

 

For market orders best execution on IB translates to $0.05 per 100 shares according to fairly reliable data sources. If I'm buying $100000 worth of shares for $5/share this would amount to $100 which isn't that much. So basically this is completely useless unless your are an active trader. So I'm not sure it matters if someone sells order flow for buy and hold investors.

 

On the other hand for limit orders it appears that IB fills are better but this is only anecdotal. And nobody really knows the reasons why. I have observed this too. One difference with IB limit orders is I believe they do smart routing. IB is continually scanning exchanges and limit orders that result in partial fills may be cancelled and rebooked on another exchange

[KCLarkin]

For market orders best execution on IB translates to $0.05 per 100 shares according to fairly reliable data sources. If I'm buying $100000 worth of shares for $5/share this would amount to $100 which isn't that much. So basically this is completely useless unless your are an active trader. So I'm not sure it matters if someone sells order flow for buy and hold investors.

 

Yes, this shouldn't be material if you are holding for a few years. But, if you are choosing a broker because they charge $6.95 per trade but the real transaction cost is $106.95, then you should at least be aware of the execution cost. Same if you are using Robinhood, which offer "free" trade.

[muscleman]

For market orders best execution on IB translates to $0.05 per 100 shares according to fairly reliable data sources. If I'm buying $100000 worth of shares for $5/share this would amount to $100 which isn't that much. So basically this is completely useless unless your are an active trader. So I'm not sure it matters if someone sells order flow for buy and hold investors.

 

Yes, this shouldn't be material if you are holding for a few years. But, if you are choosing a broker because they charge $6.95 per trade but the real transaction cost is $106.95, then you should at least be aware of the execution cost. Same if you are using Robinhood, which offer "free" trade.

 

Totally agree.

Can’t figure out how ME offers free trades and at the same time does not accept rebates. Don’t know how it can make any money then.

[stahleyp]

ME tries to make money on up-selling you: managed accouns, home equity lines of credit, credit card swipe fees (or interest), etc. I've gotten a couple calls and a few emails on other products. Not all clients are profitable. However, I'd imagine that the cost of free trades is so low that it doesn't matter too much.

[muscleman]

ME tries to make money on up-selling you: managed accouns, home equity lines of credit, credit card swipe fees (or interest), etc. I've gotten a couple calls and a few emails on other products. Not all clients are profitable. However, I'd imagine that the cost of free trades is so low that it doesn't matter too much.

 

do you experience any trade issues? For example if you place an order in ME and a similar order in another broker, is there any time when the other one got filled but not in ME?

[rukawa]

For market orders best execution on IB translates to $0.05 per 100 shares according to fairly reliable data sources. If I'm buying $100000 worth of shares for $5/share this would amount to $100 which isn't that much. So basically this is completely useless unless your are an active trader. So I'm not sure it matters if someone sells order flow for buy and hold investors.

 

Yes, this shouldn't be material if you are holding for a few years. But, if you are choosing a broker because they charge $6.95 per trade but the real transaction cost is $106.95, then you should at least be aware of the execution cost. Same if you are using Robinhood, which offer "free" trade.

 

Your statement is pretty misleading. IB's execution advantages for market orders are totally unimportant for all of us and for 99.999% of investors. $100 on a million dollar trade is a basis point...essentially its nothing unless you are an arbitrageur, HFT, or market maker. To even get to 1% drag per year your turnover would have to be 10000% a year...you would have to turn over your whole portfolio twice a week. Turning over your whole portfolio once a month would only result in a 0.12% drag. So this idea that you will save on execution costs more than you will save in fees is completely absurd. . Of course IB has other advantages...their fees are low and they have greater international reach. But investors should not fools themselves. If you buy $10000 worth of stock at IB and the fee is $15 but another brokerage it is $5....do not think its fine because IB will somehow save you lots of money on "execution"....IT WON"T!! On a $10000 trade (assuming stock is $5), IB will save you $1 on execution.

 

I'm stressing this point because I have repeatedly heard on this forum that IB was better because the amount you would save on execution was a lot larger than you would pay in fees. That is a myth.

 

OTOH, Execution for limit order fills is a different story and here IB may have advantages.

[stahleyp]

ME tries to make money on up-selling you: managed accouns, home equity lines of credit, credit card swipe fees (or interest), etc. I've gotten a couple calls and a few emails on other products. Not all clients are profitable. However, I'd imagine that the cost of free trades is so low that it doesn't matter too much.

 

do you experience any trade issues? For example if you place an order in ME and a similar order in another broker, is there any time when the other one got filled but not in ME?

 

I don't trade all that much so I can't think of any trade issues.

[writser]

OTOH, Execution for limit order fills is a different story and here IB may have advantages.

 

If you use market orders you shouldn't call yourself a value investor  ;) .

[KCLarkin]

Your statement is pretty misleading.

 

First, nothing I said is misleading. It is simply a fact. If you are doing large enough trades, the quoted $7 commission at the retail brokerages is meaningless. This just means that the industry has done a great job getting price down so that the commissions are not material, except for small trades.

 

Second, I was using YOUR numbers. You said that the difference was $100 on a $100,000 trade. Assuming this was a typo... then yes, $100 on a $1M is not meaningful. But then I wonder why you picked $1M as your trade size. I don't think any investor on here is going to do too many $1M trades entered as a single order. And if you are doing $1M trade on a $5 stock, I suspect you would have some market impact.