The competition among online brokers has transitioned from focusing on fees to prioritizing the quality of trade execution.

In recent years, online brokers have been cutting fees, making cost-conscious investors shift their focus. With equity order fees and per-leg fees for options trades disappearing, investors must now consider other factors when selecting an online broker.

Some investors now prioritize features like interest on idle cash, financial advisor support, trade evaluation tools, portfolio performance tracking, and assistance with tax calculations. Industry experts foresee potential subscription fees for real-time data and research tools in the future.

One critical but challenging-to-calculate factor affecting an investor’s profitability is the quality of order execution after hitting the “Trade” button. Are your orders routed to benefit you or your broker’s bottom line?

Order Execution Rules for Brokers

A pivotal regulation, Regulation NMS, mandates brokers to execute trades at or better than the national best bid or offer (NBBO). The NBBO represents the best ask price for purchases and the best bid price for sales. Some brokers focus on price improvement for market orders, striving to provide better prices for you.

SEC Rule 606, part of Reg NMS, compels brokers to disclose venues used for customer orders. While clients can select execution venues, most orders are non-directed. Understanding your broker’s order routing approach is crucial, as it impacts your total returns based on their algorithm.

Brokers may route orders for rebates or payment for order flow, while others prioritize obtaining better prices for clients through advanced algorithms.

Where and how your broker executes trades significantly affects your returns, emphasizing the importance of their order routing strategies.

Fidelity and Schwab’s Execution Statistics

Fidelity and Schwab release execution quality data comparing orders to the NBBO. For example, customers trading S&P 500 stocks at Fidelity save an average of $11.17 per transaction.

Fidelity Brokerage Services LLC’s latest execution quality stats for Q2 2021 reveal insights into retail order executions.

Fidelity’s transparency highlights its commitment to price improvement for customers, distinguishing its approach from other brokers in the industry.

The Role of the Financial Information Forum

The Financial Information Forum, comprising brokers and market participants, began publishing execution quality reports in 2015. Enhanced transparency in order routing benefits both institutional and retail customers.

While regulations for increased transparency in institutional trading are emerging, retail traders also deserve clearer disclosures. Understanding how brokers earn from order flow can aid retail customers in choosing the right broker for their needs.

Industry players should strive for honest disclosure practices to inform and empower retail traders before new regulations are enacted.