Fidelity is somewhat vague on this and I don’t see any good documentation relating to it. They have all these statistics about how awesome they are and how much they save me when I’m trading but very little in the ways of facts I can digest to confirm for myself.
Any help guidance on this (regarding the industry at large, not just fidelity) would be very helpful. Thank you
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When you place an order through your brokerage, they have to go out and fill that order for you. Let’s assume you’re trying to buy a stock. Your brokerage can either send it to an exchange (like NYSE) or they can send the order to a market maker. Market makers are firms that will agree to buy as much of a stock as anyone will sell them for one price (called the bid price) and will sell as much of the same stock as anyone will buy from them for a higher price (called the ask price). They make their profit based on the difference between these two prices (called the spread) for each share they can buy and sell. If your broker routes your order to such a market maker rather than an exchange, and the market maker has a tighter spread than the prices posted on the exchange, you might get a better price than you see on the website, and that difference would be the price improvement.
Fidelity advertises that they give you better prices on your orders because they don’t accept PFOF (payment for order flow). In other words, market makers pay brokers to sell to them, which might make the broker not sell to the market maker with the best price, although they need to still get you NBBO (the best price listed on an exchange). However, while you might get a better price per share with a brokerage that doesn’t accept PFOF, if you are trading small numbers of shares, the amount you save that way might not make up for the amount you have to pay in trading fees or account management fees, because every brokerage needs to charge you in some way to make a profit.
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