On June 16th, the Financial Information Forum (“FIF”), collaborating with a “FIF Working Group” comprised of retail brokers Charles Schwab, Fidelity and Scottrade, as well as wholesale market makers Citadel, KCG, Two Sigma Securities and UBS, released enhanced statistics on retail execution quality. The goal of the FIF Working Group was to improve access and create uniform execution quality statistics for particular firm’s orders. These would allow the retail community to make apples to apples comparisons of metrics across firms. At KOR Group, we welcome quality statistics and increased transparency. However, these enhanced statistics are very narrow in scope, covering only market orders and employing just five metrics (Average Order Size; Shares Executed at Current Market Quote or Better; Price Improvement; Average Savings per Order; and Average Execution Speed).
Although the statistics are narrow in scope, there are interesting bits of information to be gleaned from the reports. Most interesting to us is the disparity of Price Improvement and Average Savings per Order given to Odd Lot trades. Schwab averages just 68% Price Improvement with Odd Lot Trades in S&P 500 stocks while Round Lot trades from 100-9,999 shares averaged 85% in Price Improvements. Worse yet, S&P 500 Odd Lots with Schwab averaged just $0.05 in savings per order compared to $4.33 for orders from 100-9,999 shares. Fidelity’s statistics didn’t fare much better, with Odd Lots receiving 73.413% in Price Improvement and $0.49 Average Savings, while Round Lots averaged $9.17 in overall savings per order. And while Scottrade’s Price Improvement percentages were comparable to Round Lot trades, Odd Lot average Savings were a scant $0.07 per Order compared to Round Lot savings of $14.00 per order.
Few would argue that Odd Lot trades are the most benign orders. Moreover, given their potential toxicity, most would agree that they should be subject to the highest levels of Price Improvement. This, however, is not the case. At a recent conference, we posed questions to some of the wholesalers participating in the program regarding the disparity of Odd Lot Price Improvements. In response, they claimed that in the coming quarters, Odd Lots will see higher metrics.
We are befuddled by this response. It’s not as though the publication of the FIF statistics are a revelation regarding the disparity of Odd Lot Price Improvements. Each of the firms in the working group has had access to these statistics internally for many years. Odd Lots also comprise a significant share of overall transactions as retail investors typically invest by dollar amount, providing active S&P 500 stocks like AAPL, CMG, NFLX, PCLN, GOOG and MA with a high percentage of retail Odd Lot trades.
As we delve with greater detail into Odd Lot Price Improvement by looking at average price improvement per share (Average shares/Average Savings Per Order), a different story emerges. Here, Fidelity provides more than a penny of Price Improvement per share, towering over competitors Schwab and Scottrade, each of which provides less than ¼ of a cent in Price Improvement per share.
In our full report available to subscribers we examine many more aspects of the statistics and examine which wholesalers are providing the highest quality executions. You can read the full report and much more of KOR Group’s research by subscribing via the following link: http://kortrading.com/membership-account/membership-levels/
You can learn more about FIF’s program and associated statistics here.