Why did IB do so poorly in this businessweekonline.com rating
- Thread starter donv04
- Start date
Could anyone answer my own question?
The rating article states:
"One key execution statistic, Shapiro says, is price improvement, which means getting a better price than the best bid (the price a broker will give you if you're selling shares) or the offer (the asking price if you're a buyer) on an exchange-listed stock. In the previous example, a broker who is able to get shares of the stock for $9.99 for a buyer or $10.06 for a seller would be improving the price by one penny. Not a lot, but if you trade enough and in large enough quantities, it adds up."
My understanding is that for a buyer with a $10.00 bid and a $10.05 offer price improvement would be $10.04 for a buyer or .01 off the offer and $10.01 for the seller.
Please verify whether I or the article is correct on this.
Many thanks.
"One key execution statistic, Shapiro says, is price improvement, which means getting a better price than the best bid (the price a broker will give you if you're selling shares) or the offer (the asking price if you're a buyer) on an exchange-listed stock. In the previous example, a broker who is able to get shares of the stock for $9.99 for a buyer or $10.06 for a seller would be improving the price by one penny. Not a lot, but if you trade enough and in large enough quantities, it adds up."
My understanding is that for a buyer with a $10.00 bid and a $10.05 offer price improvement would be $10.04 for a buyer or .01 off the offer and $10.01 for the seller.
Please verify whether I or the article is correct on this.
Many thanks.
Either would be price improvement for a market order, but his point was that price improvement depends on the specialist, not the broker, at least in NYSE stocks. All the broker can do is transmit the order to the floor. So the concept of which broker gets more price improvement is meaningless.
Disagree. Broker can route the order to the floor, or to ECNs, or to Nasdaq's facility for NYSE/AMEX listed stocks, or to a particular Nasdaq market-maker, or broker can "internalize" (take the other side) of the order. Broker can use a variety of different strategies for a smart-router to price and to re-price and to route and to re-route and to split and to re-split the order, until it finishes working.
I don't think the article's comparisons have any meaning, even if the raw statistics are true. I think it is a classic case of comparing apples to oranges. If a high proportion of IB customers are making markets or employing specialist enveloping strategies, then they will, for example, have a higher proportion of unexecuted limit orders. The statistics would only be meaningful if the all the different firms had similar customer bases employing similar strategies, which is obviously untrue, and so, the statistical comparisons presented by the article are meaningless.
donv04's comment about the article's specific example on price improvement makes a good point, and demonstrates that the article's author really, truly has no idea what he is talking about.
The only thing I don't understand is why the IB guys are shocked. I emphasize that even if the statistics were true (and steve sanders at IB throws doubt on those numbers), those numbers are meaningless, because they are not adjusted to account for differences between the way customers place their orders and select and trade their different strategies.
I think it shoud be possible to make statistical comparisons between brokers, to measure who does the best job of order execution, but just making raw comparisons of limit order fill rates and price improvement rates is hopelessly naive, crude, and lacking in statistical validity.
I think there are some things IB could do to improve its order execution, but I would be very surprised if any other broker could even match the quality of execution provided by IB.
i wonder if it's possible that IBs cust base has a lower limit fill rate from a higher proportion of people submitting as price makers using the api, etc
I believe that the answer to your question is obviously "yes".