While reading Matt Levin’s Newsletter I came across a study of the impact of “Payment For Order Flow” (PFOF). According to it, free brokers have, on average, a better execution price. In particular, Interactive Brokers Pro had the worst. This came as a surprise to me.
| Broker | Cost in % of spread* |
|---|---|
| TD Ameritrade | 2.8% |
| Fidelity | 14.2% |
| E*Trade | 13.9% |
| Robinhood | 23.2% |
| IBKR Lite | 30.5% |
| IBKR Pro | 31.2% |
PFOF is the process through which free brokers finance themselves: instead of just submitting the order to the market, they first ask off-exchange wholesalers if they could fill the order at a better price. The wholesalers get opportunities to trade with retail investors, the broker gets a kickback and the retail investor some price improvement. According to this article, an unofficial rule is that at least 80% of the kickback should go to the investor.
The end result seems to be that, if your broker is used by people whose order flow is rich in opportunities, you get a discount.
IBKR’s page on the topic does mention that, if the practice didn’t exist, the spread would most likely be narrower. Who knows?
From a more practical perspective, I wasn’t able to find a study of execution prices for brokers available in Switzerland. Does anyone know of one?