Actual Stock Trading Frictions by Broker

Do brokers do better for clients than the bid (ask) when executing market sell (buy) orders? Which ones do best? In their August 2022 paper entitled “The ‘Actual Retail Price’ of Equity Trades”, Christopher Schwarz, Brad Barber and Xing Huang measure stock trade execution quality in six brokerage accounts across five retail brokers offering zero-commission trades. Brokers for four of the six accounts receive payments for order flow, and one of the two accounts that do not charges commissions. Five of six accounts route orders to the same six wholesalers. They select for trading 128 stocks with characteristics representative of all U.S. common stocks priced over $1.00. All trades are via market orders of $100 or $1000 for stocks bought and sold within 30 minutes during 9:40AM EST to 3:50PM EST. They assess execution costs (including commissions and exchange fees/rebates) relative to the prevailing best bid and ask quotes immediately before and after the trade execution. Using this data for 74,801 small trades during December 21, 2021 through June 9, 2022, they find that:

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