Price Improvement

Price improvement is a key metric of execution quality in U.S. equity markets and one of the primary ways in which broker-dealers and market venues demonstrate that they are fulfilling their obligation to obtain the best reasonably available execution for customer orders. The baseline for measuring price improvement is the national best bid and offer (NBBO) — the best displayed bid and offer prices consolidated across all U.S. national securities exchanges — at the moment an order arrives at the executing venue.

For a market buy order, price improvement means the order executes at a price below the best displayed offer. For a market sell order, it means execution above the best displayed bid. For a marketable limit order, it means execution at a price better than the order's limit price (provided the limit price would have otherwise been the binding constraint). Price improvement measured on a per-share basis is the difference between the NBBO price and the actual execution price, and in aggregate across an order represents real dollar savings to the investor.

In the current U.S. equity market structure, wholesale market makers are the primary source of retail price improvement. Firms handling internalized retail order flow — which is predominantly composed of relatively uninformed individual investor trades — can offer prices inside the spread because they face lower adverse selection risk on this flow than on anonymous exchange order flow. Wholesalers typically provide price improvement on the order of a fraction of a cent per share on liquid, large-cap securities, which can seem modest on a per-share basis but accumulates meaningfully across millions of trades executed daily.

The SEC requires market centers to report price improvement statistics monthly under Rule 605. These reports disclose the percentage of eligible orders that received price improvement, the average amount of price improvement per share, and the distribution of improvement by order size. This public data allows brokerage firms, researchers, and regulators to compare execution quality across venues and assess whether routing arrangements are genuinely serving the interests of retail investors.

Ideally, price improvement benefits both the investor receiving better execution and the health of the overall market, since it reduces the total transaction cost of participating in equity markets. However, critics of the current wholesaling model argue that the availability of price improvement to retail investors has come at a cost to the quality of public price discovery on exchanges. If the highest-quality retail order flow never reaches lit exchanges, the displayed quotes on those exchanges may be wider than they would be with full order flow competition, potentially resulting in a market where the posted spread is artificially wide even as individual retail trades receive modest per-share improvements.

Price improvement is also relevant to institutional trading, where large orders that execute at the midpoint of the spread in dark pools or block crossing networks receive implicit price improvement relative to trading at the full offer or bid. In institutional contexts, improvement is more commonly measured by reference to the VWAP or arrival price rather than the NBBO alone.