When you place a trade, the price you receive and how quickly your order is executed can affect your investing experience. That's why brokers are required to evaluate the quality of their trade execution practices and seek what's known as best execution.
To help make execution quality more transparent, the Securities and Exchange Commission (SEC) requires certain firms to publish standardized reports under SEC Rule 605. These reports provide information about how customer orders are executed and can help investors better understand factors that may affect their trading outcomes.
Why trade execution quality matters
Whether you're investing for the long term or trading more actively, execution quality can influence the outcome of your trades. For example:
- A better execution price can reduce the cost of buying a security or increase proceeds from selling one.
- Faster execution can help reduce the impact of changing market prices.
- Higher fill rates can increase the likelihood that an order is completed as intended.
Even small differences can add up over time, particularly for investors who trade frequently or place larger orders.
What is SEC Rule 605?
SEC Rule 605 is a requirement for certain market participants to publish reports that measure the quality of order executions. The rule was updated to expand reporting requirements and make execution-quality information easier for investors to understand. Firms subject to the rule must publish monthly reports containing standardized metrics related to trade execution.
The goal is to provide greater transparency into how customer orders are handled and executed. These reports don't tell investors which broker is "best." Instead, they provide data that can help investors understand how orders are executed and evaluate execution quality across different firms.
What is best execution?
Best execution is a broker's obligation to seek the most favorable terms reasonably available when handling customer orders. Factors considered in a broker's best execution process may include:
- Execution price
- Speed of execution
- Likelihood an order will execute
- Available liquidity
- Characteristics of the specific order
Best execution is a process rather than a guarantee of receiving the best possible price on every trade. Market conditions change constantly, and brokers use reasonable diligence to pursue favorable outcomes for customers.
Rule 605 reports provide statistical information that can help investors understand outcomes associated with a firm's execution practices.
Key measures of trading execution quality
Price improvement
Price improvement occurs when an order is executed at a price better than the publicly quoted market price available when the order was received.
The reference point is often the National Best Bid and Offer (NBBO), which represents the best publicly displayed buy price and sell price across market centers. For example, suppose the NBBO is:
- Best bid: $10.00
- Best ask: $10.10
A customer places a market order to buy shares. If the order executes at $10.08 rather than $10.10, the investor receives $0.02 per share in price improvement. For a 500-share order: $0.02 × 500 = $10.00 in savings.
Execution speed
Execution speed measures how quickly orders are executed after being received. Faster execution may help reduce exposure to changing market prices, particularly during periods of heightened market activity or volatility. Under the modernized Rule 605 framework, execution time is measured with greater precision, including millisecond-level reporting.
Fill rate
Fill rate measures how much of an order is executed. For example:
- A complete fill means the entire order was executed.
- A partial fill means only a portion of the order executed.
Fill rates may be particularly relevant for:
- Larger orders
- Less-liquid securities
- Certain types of limit orders
Understanding spread-related measures
A spread is the difference between the best available bid price and ask price, similar to the NBBO mentioned earlier. For example:
- Bid: $10.00
- Ask: $10.10
Quoted spread = $0.10
To understand bid and ask prices, think of a real estate transaction. Buyers are willing to spend $290,000 (bid), while sellers list homes for $300,000 (ask). The $10,000 difference is the spread. If a buyer raises their bid or a seller lowers their ask, agreeing on price, a transaction can occur.
Rule 605 also includes measures that compare execution prices to the midpoint between the bid and ask. These statistics help investors understand how closely executions align with available market prices.
Why comparing brokers isn't always straightforward
Rule 605 reports provide useful information, but comparisons between brokers should be viewed carefully. Several factors can influence reported results, including:
- Customer trading behavior
- Different firms may serve customers with different investing and trading styles.
- Order sizes
- Small orders, large orders, odd-lot orders, and fractional-share orders can experience different execution dynamics.
- Market conditions
Execution outcomes may vary based on factors such as the time of day, market volatility, and available liquidity. In addition, brokers may route orders to different combinations of trading venues, which can influence execution characteristics. Because of these factors, execution-quality statistics should be evaluated within the broader context of a firm's customers, order flow, and overall execution practices.
Fidelity's approach to trade execution quality
Fidelity seeks to provide strong execution quality for all customers. Our approach combines:
- Ongoing analysis of execution-quality data
- Connectivity to a broad range of trading venues
- Technology designed to support efficient trade execution
- Continuous evaluation of execution outcomes and routing practices
Whether you're a long-term investor, an active trader, or somewhere in between, Fidelity's goal is to help deliver an effective trading experience and pursue favorable execution opportunities on your behalf.