That’s interesting. Of the brokers I’ve used - I used to feel like IB had the best executions, but I hadn’t monitored it as closely in the past couple years.
Yuval, based on your comment I’m inferring that you’ve experienced degradation in IB execution performance relative to companies like Fidelity/Schwab? thanks,
For me, it was interesting to watch how people wanted to keep believing in Interactive Brokers and kept saying they were good at order price improvement despite a complete lack of evidence (other features like Algos, the ability to loan share etc aside).
For a while there has been absolutely no evidence that interactive brokers was better. for order price improvement and real data could be found on the subject. There have been posts on this topic before (with data). The data was not as definitive as this article but it is also true that there has been a complete lack of any data suggesting that IB was better for order price improvement.
Even IB has been unable to give any data to support their claim and this has been the case for a while. Here is their web site about “SmartRouting.”
They say their statistic are “impressive” in this screenshot. Possibly a term vague enough that it might not be technically false if shown to the SEC.
But then they do not seem to possess any statistics worth presenting on this page. None whatsoever (last line in the screen shot saying how good their statistics are). There are no statistics at all on this page. Link to full page where no actual statistics exist: [url=https://www.interactivebrokers.com/en/trading/smart_routing.php]https://www.interactivebrokers.com/en/trading/smart_routing.php[/url]
TD Ameritrade’s page on the subject for comparison. They have some statistics that they want to share.
Wait so people actually use market orders?
Some criticisms of the study in this thread on elitetrader:
“FreeGoldRush”:
And from “Fain”:[quote]
I’ve tested against 4 Brokerages in Canada and they came ahead each time.
…
These guys were too broke to do a proper study. Notice the trade sizes are all below a board lot. Could be internalizers get better odd lot fills but Increase the trade size and IB comes out ahead. Didn’t test options, small order sizes, only large cap companies, only US companies.
[/quote]
P.S. Reading that other forum reminded me once again how good the quality of the dialogue on this forum is! This forum is a treasure!
Yes, maybe the big brokers are better at getting fill improvements on large cap highly liquid US stocks. They might be worse at other things. IB has been used for a lot time in the professional day trading community despite being fairly non-intuitive and a clunky UI (imo), and I assume it’s for a reason. It probably comes down to the right tool for the right user on the specific job.
As mentioned, this study was for market orders. I wonder if limit orders would show different results.
Yes, my anecdotal experience is that I tend to get slightly better fills on Fidelity than on IB. But I may be wrong. I just executed VWAP sell orders on Fidelity and IB for the same stock at the same time and got almost exactly the same fill price. IB got a better fill by 2 basis points.
Matt Levine at Bloomberg has an interesting take on this paper:
It’s worth reading the piece in full if you can access it: Some Free Brokers Are Cheaper Than Others - Bloomberg
While I like the original paper’s data, its background regarding order flow and payment for order flow is lacking. Likewise, I think Bloomberg’s paper is overly simplistic.
Here is a page the describes order flow at Interactive Brokers for IBKR-Pro: IBKR-Pro Payment for order flow
You find one for any broker. There are a lot of “arrangements” in these legally required disclosures.
For example, Dark Pools which are mentioned in the link above (and used by other brokers). These can be an important source of order price improvement—for market orders, some limit orders and MOST VWAP orders. Some Dark Pools, for variousr reasons (including the level of participation in the Dark Pool), are better than the others.
IBKR may not have access to Fidelity’s Dark Pool (and vice versa). For sure they have no obligation to use each other’s Dark Pool.
But Dark Pools are just one thing that the quoted portion of the Bloomberg article (and the original article) did not mention as being possible causes for the difference.
You can sort through the disclosure yourself and make up your own mind on how some of the “arrangements” might affect the price you get. However it happens that you end up paying more (or less) with a broker, it is no accident.
And yes, with some brokers you can get really fast market orders if that is important to you. You are more likely to notice how large of an order you can make before the price you pay exceeds the NBBO. Some brokers will do better at that than others and last time I looked you can find some serious data on that too.
Yuval - is VWAP your preferred trading algo on IB? Thanks
It depends. For very large orders, yes. Otherwise I go with Relative NBBO Peg via P123.
Whichever broker actually does better, a VWAP order is a great opportunity for the broker and possibly for a P123 member.
Above, there is a discussion about the study and the smaller order size used in the study. Even a very large VWAP order will be broken up into smaller orders throughout the day. Often into 100 lot orders if I recall (I tend to use percent-of-volume orders now and I have not looked at the individual trade size). So it is not entirely clear that order size is a consideration for determining which broker has a better VWAP order. The study may be pertinent no matter how large your total VWAP order may be.
At IB, there is the potential for a rebate for being a market-maker on some of those trades, I believe. IB may share some of that rebate with you at times. You may find that IB is the better broker for you, in part because of that.
Presumably other brokers can get a rebate for being a market maker when executing market-maker trades through these exchanges. It is interesting that this does not count as payment-for-order flow it seems.
I have taken the time to look at some of the individual orders at Fidelity (a while ago) and there is order-price-improvement of some of the the individual VWAP orders going through at Fidelity. But it is difficult to quantitate how much total improvement one gets by the end of the day.
VWAP orders would present an opportunity for regular members who do not have computers that can execute tens of thousands of simultaneous orders with multiple brokers (as is done in the study above). The VWAP orders do that randomly (but not simultaneously) throughout the day for you. About 30 VWAP trades with 2 different brokers would be more trades than you would need to reach a conclusion.
So you can find your own definitive answer if you are investing enough for this to matter to you. There is no good reason for you to listen to any of my BS (or anyone else’s).
As far as real data that I have generated myself, I compared Folio Investing to Fidelity (with market orders) before I switched to Fidelity—alternating which broker I placed an order with first (at about the same time). Fidelity won by a huge margin. There was basically no order-price-improvement at Folio Investing for market orders when I looked a this.
My main takeaway from my little study: the difference can be huge which I think confirms what the paper said: there can be an order of magnitude (10X) difference according to the paper. Hmmmm……I think I am going to do a little more than say: “broker X has a lot of customers (and kind of a mystique), so I will use them.”
If anyone does the above study with VWAP trades and wants to share it, please include the commissions as well as any rebates.
Yuval Be careful with passive NBBO pegs, this can cause you to get toxic fills
Here are some details of: Fidelity’s price improvement statistics.
This includes SP500 vs non-SP500 orders and breaks down price-improvement by order sizes which people have expressed an interest above.
This is produced by the Financial Information Forum (FIF). Sadly, Fidelity and 2 Sigma Securities are the only organizations providing information to FIF at this time (there used to be more).
I’ve skimmed the study, and it’s interesting for sure, but there are several reasons why I would take it with a grain of salt and not rush to move all your trading accounts over to TD Ameritrade tomorrow.
As Matt Levine noted in his column, the trade sizes of $100 are not just small, but comically small. If one were only ever managing position sizes of $100 with market orders or marketable limit orders, then this study may be pretty representative for them. But even in the Fidelity price improvement report linked above, you can see the price improvement metrics drop as order size increases.
Their program is designed to randomly send buy orders for and then liquidate 30 minutes later. This randomized order flow is the definition of uninformed order flow that PFOF providers love and will happily eat up. The more informed, alpha-driven flow would likely not get the same beneficial fills from PFOF participants.
They are not doing a fully apples-to-apples comparison across the same date range. Transaction costs can vary greatly over time, so this is a bit of a sin. It looks like they ameliorate this a bit by providing some pairwise broker comparisons across the intersection of their common dates, but as a whole the data consists of different date segments. For example, their IBKR Pro and Lite data is completely disjoint, as it looks like they had a single IBKR account that they just flipped from Pro to Lite in April, so the IBKR data isn’t comparable at all.
It looks like they are estimating price improvement metrics and on vs off exchange execution by trying to locate their orders in the TAQ data stream. This seems to be an error prone and non-scalable approach. For example, if they were sending more realistic round lot orders, it would be impossible to pick out their orders reliably from the stream. Likewise, calculating price improvement using the quote that was in effect just before the trade in the TAQ data would skew your results depending on broker latency. The more standard way would be to benchmark the order to the quote at the time of submission or routing decision.
In fact, that’s what I would recommend each person do, if possible – measure their total transaction costs for their own order flow. If you use IBKR, they provide fairly decent transaction cost analysis (TCA) reports for you. Moreover, if you send algorithmic orders, then the cost of the entire order relative to the quote at the time your order was accepted (its arrival price) is shown in the report. It’s not as clean if you are slicing and sending your own limit orders, as the order linkage may not be clear, and the market impact of your manual order working may not be measurable to them – you’d likely have to measure this yourself.
This is another reason I’d encourage P123 to expand their support for the full range of algo orders on IBKR. Arguably the biggest industry standard, the Arrival Price order, is not yet supported. And perhaps more importantly, IBKR supports algo orders for other brokers, notably CSFB, Fox River, and Jefferies, who are well-established in the execution space. Having this wider order support, and the ability to randomize order types would be a huge step up.
Almost no, and I mean literally zero, retail market orders have legal informational edge over the market makers. The SEC legalized the implicit pricing of how dumb retail orders are leading to PFOF. In other words, whoever (Jump, Citadel, Jane St. etc.), can extract the most value from how mispriced your order is gets to fill your order. Why else do they pay the brokerage house for the right to fill your order? As soon as the market maker deems your order to not be mispriced (like, when they think you may win on the trade, the let it go to the exchange for a worse fill). So you should think of it as losing less for only market orders.
In regards to IB, Petterfy rightly believes that minimizing trading costs must lead to routing everything to a central exchange for auction. Of course, we don’t have a central exchange and PFOF routes less to exchanges, which widens the quotes, which artificial leads to better price improvement. Why does this toxic cycle exist? Because that maximizes market maker profits in the age of digitization and penny wide quotes.
TL:DR Don’t place market orders. But if you do, place them at brokerage houses that sell your orders for internalization (i.e never go to an exchange).
Korr,
Thank you. Can you expand on this for “marketable limit orders” and also on VWAP orders (and percent-of-volume orders) if this has been an interest of yours? I think a VWAP order is essentially multiple “marketable limit orders” made throughout the day.
I think a marketable limit order MAY get price improvement through internalization at some brokers but also there could be a rebate for being a “market maker” for some of the limit orders (the broker getting some of the rebate) and this could be a factor in where the order is directed. Any data on this in the literature or on the broker’s web sites is limited. E.g., the original paper does not directly address this.
Thank you in advance if you have anything to add with regard to “marketable limit orders” or algorithms like VWAP that may involve a marketable limit order.
Best,
Jim
Hi Jrinne,
I have no experience with marketable limit orders so I can’t speak to personal experience. The reason I don’t is because every time one crosses the spread, one overpays – paying a convenience (aka liquidity) fee to the market makers.
I have experience and some knowledge with VWAP orders. This is a highly competitive market as VWAP ex ante is theoretical - that is the benchmark by which the order is measured. So anyone who has designed a VWAP algo is continually improving the mechanics of the algo to remain competitive. I believe, but cannot be certain – all these mechanics are held private – all utilize a variety of order types. The idea is that you want to trade when volume is heaviest as you trade against customers, not dealers, so overall costs are minimized. Since book depths are notoriously misleading , one must minimize order size all else equal, resulting in having multiple round lot orders.
What’s the best way to get filled and minimize both moving the spread and crossing it? The consensus has been and continues to be VWAP. This is not to say other order types, including algos but excluding market orders, are worse. Just depends on what you are you trying to achieve.
Hope that is informative for you.
Korr,
Thank you. I get what you are saying about sending a limit order to an exchange (and internalization). I appreciate your further insights.
Jim
Thomas Peterffy–the CEO of IB–just sent out an email regarding trading costs. Among other things, he explained that when a marketable order trades with a limit order on IBs dark pool, the price will favor the limit order. That’s by design.
In other words, the study that I quoted to start this thread is not applicable to limit orders (or any other non-marketable order) at all.
