Hands Off Price Improvement
Traders Magazine, July 1999
Price improvement, the term used to signify the execution of a stock trade for a better price than the publicly available best bid and offer is a regulatory delusion. Price improvement doesn't, in fact, improve the prices received by retail investors for stock. It only takes account of the gross trade price without an adjustment for commissions, processing costs, immediacy, size, liquidity, certainty of liquidity services and other factors.
As a measure of the quality of order execution, the price improvement ratios of individual firms and markets can often be misleading. Unfortunately, the push for price improvement causes competition to be guided by these same price-improvement ratios, rather than by more objective customer quality execution factors. These factors link the so-called NBBO - the National Best Bid or Offer - with immediacy, limit order display and automatic order processing.
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