Trade execution

Interesting article in WSJ about a paper on trade execution. Authors used their own money to make trades. Some brokers give you a better price than others. Top was TD Am. Bottom was IBKR Pro. Link to WSJ article and the paper:

https://www.wsj.com/articles/pricing-of-stock-trades-varies-…

https://papers.ssrn.com/sol3/papers.cfm?abstract_id=4189239

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Interesting that they review TD but not Schwab. And second place was E-trade which I seldom ever hear about anymore.

Macroman77

It’s an extremely interesting paper, worth a look if you’re a geek about such things.

To oversummarize it :
The publicly available information is useless, but in fact the differences are big. Not just academically big, but monetarily material.
It’s not because of payment for order flow.
It’s not because of anything the brokers are doing.
It’s not because some market centres (exchanges) are better than others.
It’s because some brokers get good executions from [all] market centres, and some brokers get bad ones.

Among the several factors they speculate might be involved in why some brokers get better treatment—

  • Some brokers do more trades. TD does the most on their list, and gets the best executions.
  • Some exchanges might care whether the trades come from the dumb money or smart money.

"Some brokers may have investors that generate order flow that is more attractive to market centers.
For example, the broker’s investor clientele may generate trades that are less correlated to each other,
less concentrated, and/or less informed than its competitors. The classic Kyle (1985) model provides
an example of how this variation in the quality of order flow can affect price improvement; a market
with few informed trades should lead to lower transaction costs since the market maker does not need
to worry as much about adverse selection"

Certainly one conclusion is that, at a given level of commission, TD is a better bet than Robinhood or IB if you want a good fill on smallish market orders for equities.
I hope they do a follow-up using limit orders.
For the house, a “MARKET” order is short for “Make A Real Killing Every Trade”.

Jim

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Interesting that they review TD but not Schwab

Their experiment “generated approximately 85,000 trades over the December 21, 2021, to June 9, 2022, period.”
When they started their experiment Schwab already had the approval and had purchased TD Ameritrade for 21 billion. Account holders were told the trading platforms were being merged with the best features of each retained. But I also wondered why they didn’t test Schwab which is larger than E-Trade.
Interesting that Morgan Stanley paid 13 billion or $2500 per customer for each of the 5.2 million E-Trade accounts. Else ware E-Trade has 965 billion dollars under management. If I’m understanding these numbers the average E-Trade customer has $185.5K invested. Gives one a little perspective of the amount of profit brokerages are able to make off one’s account.
The purchase price / customer for TD Ameritrade was in the same ballpark.

RAMc

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Yes, I need to start using limit orders consistently. I’ve really not had any really bad results but you are taking a risk with the market order and you can almost always shave a little margin with a limit order.

Macroman77

Yes, I need to start using limit orders consistently. I’ve really not had any really bad results but you are taking a risk with the market order and you can almost always shave a little margin with a limit order.

Macroman77

Appreciate it if you(and others) could expand on this. What stood out clearly is Mungo mentioning that “market trades” are clearly to the House advantage. I see that at times but not all of the time and certainly would/could make a difference if one does numerous trades a day. I have tried to make a study of this over the years but convinced regardless, the house always wins unless your directional timing is reasonably accurate.

What stood out clearly is Mungo mentioning that “market trades” are clearly to the House advantage.

No, not always. Maybe rarely. But the thing is, you are leaving yourself open. With a limit order you know you can’t get picked off. You might not get a fill, but you won’t get a fill that is far away from where you expected.

At Etrade, I most always get a fill better than the bid/ask. Even when I was doing only market orders.
(I was grandfathered in to the BrownCo commissions of $5 market but $12 limit. Now that they went to no commission, I now always do a limit order.)

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The market data that we get always has some lag. For those like me that trade with free accounts the lag is about 15 minutes. If you place a market order the price can move quite a bit and you can sell for less or buy for more than you planned. I believe that all brokers employ some guardrails so that if the price moves more than a certain amount your trade will not execute but it still can be a rude surprise.

If you place a limit order instead of a market order you can be assured that you will get a price that is at least as good as your limit price. For example if you places a limit order to buy at $ 10.00 you know that you won’t pay $10.05 for the shares. If there are no takers for your offer your order may go unfilled but you won’t overpay your intended price.

In today’s market without a clear direction it would be rare to place a limit order and not see it filled. In a hot market it’s very possible that the shares that you’re interested may move away from your offered price and you’d miss out. That’s not the current situation.

Macroman77

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I believe that all brokers employ some guardrails so that if the price moves more than a certain amount your trade will not execute but it still can be a rude surprise.

You may believe this, but it isn’t so.

During the flash crash, the only people whose outrageous trades didn’t “stick” at the terrible prices were those trades that were (unfairly) unwound by the exchange on securities that has dropped more than (IIRC) 60%.
Anybody who had a market sell order in may have had a sale at 59% lower than the price they last saw.

Maybe some brokers took pity on their clients, I don’t know.
But brokers are not known for their pity. At the very least, you would not want to count on it.

A market sell order is a firm legally binding commitment, in advance, to accept whatever the next (as yet unknown) bid will be.
It might be one cent. If so, that’s not an error, it’s the true market price.

Jim

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