Investors get a wide range of prices of stock trades depending on which broker they use, according to a study that’s cited in an article in The Wall Street Journal. Out of the half a dozen most popular brokerages, TD Ameritrade offered the best prices while Interactive Brokers Group, which caters to day traders, had the worst.
Most investors aren’t aware of the disparities in the prices between brokers, the lead author of the study, Christopher Schwarz of the University of California, Irvine, told The Journal. Major online brokers offer statistics on their websites, but it’s difficult to compare the numbers between different brokers. There are regulations in place requiring brokers to find the best possible price for their clients, but often brokers try to do a bit better than the best price shown on public exchanges, a practice known as “price improvement.” The study zeroed in on the practice, finding that there was a significant difference between brokers. For example, at TD Ameritrade, there was a price improvement of around 8 cents per trade, while at Interactive Brokers, there was only a 3 cent price improvement. Those small amounts add up, especially for investors who trade often; with the numbers at TD Ameritrade, individual investors would save billions of dollars every year, collectively.
However, the study found that “payment for order flow,” where brokers garner payment for directing customer orders, didn’t have much effect on the quality of trade executions. Many Wall Street insiders have criticized the practice by saying that market makers who give a bigger payout to brokers don’t offer as much price improvement. But according to the study, the platform that had the worst price improvement—IBKR Pro—doesn’t even practice payment for order flow. Neither does Fidelity, which came in second behind TD Ameritrade (which does).
Regardless of the study, the SEC is set to announce a package of proposals to overhaul regulations governing small investors’ trades, the article reports. And some of the brokerages included in the study said its results were skewed because the authors made fairly small orders, rather than larger ones that are more typical for their customers. Steve Quirk of Robinhood told The Journal, “Every broker is going to concentrate on getting the best execution for their customer base, and those customer bases are different,” while Milan Galik of Interactive Brokers, which ranked at the bottom of the study, said, “We have serious reservations about the meaningfulness of their conclusions.”