Retail Brokers Show Dramatic Routing Differences

The following charts show the routing practices of 3 retail brokers over the past 4 quarters: Schwab, Etrade and Fidelity. Fidelity stopped accepting Payment For Order Flow towards the end of 2014, instead diverting all flows to price improvement (although when they did accept PFOF in 2014, their rates were roughly half that of Schwab and Etrade). We are posing a simple question to our readers: How can all three brokers be achieving Best Execution? Schwab had a guarantee to send orderflow to UBS until the contract ended last year—but if they were getting Best Ex with UBS, wouldn’t they have continued routing all their flows there? What about a broker with relatively unconflicted routing, such as Fidelity? Shouldn’t other brokers look very similar? How can these three pictures all represent Best Execution?

Take into consideration last month’s FIF reports, which demonstrated that not all wholesalers are created equal, that there are execution quality differences.

Another question: If a broker is regulatorily mandated to conduct a ”regular and rigorous review” of execution quality, which includes venues they do not route to, why is it that none of the brokers are routing to IEX? If price improvement is supposed to be considered before payment, and most IEX executions are at the midpoint (far more price improvement than the wholesalers), wouldn’t you expect to see at least de-minimis routing? We are not trying to promote IEX, and in fact are sure there would be evidence that superior price improvement would be found at other predominantly midpoint venues, such as BIDS, which has roughly the same percentage of midpoint executions.

In the following charts, you’ll note some interesting trends. Schwab routes a similar amount to UBS right now as Etrade routes to G1X. The difference is that Etrade is contractually obligated to route to G1X. Further, Fidelity’s routing remains consistent and diverse over time. So who’s getting Best Ex, and does the term even mean anything anymore?






So is this really important? Can the difference be quantified? Using last month’s FIF reports, we can actually quantify it dramatically. Etrade does not disclose price improvement by order size, and probably with good reason as they know what the numbers would show. We can assume they would look very similar to Schwab’s, as a retail broker that diverts most flows to payment, rather than price improvement, thus maintaining perverse routing incentives and questionable Best Execution adherence.

Here is a comparison of Fidelity vs Schwab in terms of average price improvement per order, by order size. We would be happy to repeat this comparison if other major retail brokers make the data available. The difference is stark:


There’s little to say when you turn this into percentage terms:

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Someone really needs to explain how PFOF provides for Best Ex (not Good Ex, or Okay Ex, but BEST Ex!). And Fidelity is single-handedly ending the argument that it keeps commissions low and services high, we all know that it simply accrues to the bottom line and into the dividend.

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