No-fee trading has transformed the retail trading landscape, making it possible for everyday traders to participate in the markets. Payment For Order Flow (PFOF) — fees for trades paid to brokerages by market makers like Citadel Securities and Virtu — have garnered increased attention since the GameStop (GME) saga grabbed national attention last year.
A new study aimed at identifying variation in price execution across different brokers using six accounts found a large variation among platforms such as Robinhood (HOOD) and E-trade.
“There's just a huge difference in execution between the six different brokers that we used,” said Christopher Schwarz, University of California Irvine professor of finance and faculty director of the Center for Investment and Wealth Management.
“Essentially, what we found is the amount the broker is getting paid for the trades really had no relation to how much execution your — what price execution you were getting. And there's really no way for you to know ahead of time which broker was giving you the best price execution of these trades and which broker was giving you the worst execution,” said Schwarz.
Although the study aims to look at the dynamics surrounding no-fee trading and PFOF, when asked, Schwarz mentioned the brokerage with the best outcome.
“The best broker in terms of market trades only, looking at market trades only, was TD Ameritrade. They were number one,” said Schwarz.
The professor's team found price execution data needs to be provided at the broker level. This way consumers can better compare brokerages.
“Essentially, what we found is the market centers are systematically giving brokers different pricing,” said Schwarz.
To solve this, market makers should say “exactly what kind of pricing you get at TD versus Robinhood versus eTrade versus Fidelity. And then consumers have a much better way to make a comparison about what kind of price execution that they're getting,” he added.
Ines is a markets reporter covering equities. Follow her on Twitter at @ines_ferre
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