Online Broker Execution Quality in 2025: Why It Matters More Than Fees

As commission fees drop to zero, the spotlight shifts to the quality of trade execution in online brokerage services.

In recent years, savvy investors have witnessed many online brokers remove fees for equity trades and options legs, making cost no longer the main differentiator. Now, retail investors must evaluate other critical factors when selecting a broker.

Some investors prioritize interest earnings on uninvested cash or value-added services like financial advisory support. Others seek advanced tools for trade analysis, portfolio performance tracking, or tax impact calculations. Industry insiders anticipate that real-time market data and research tools may soon require subscription fees.

However, one of the most significant yet complex aspects influencing investor profits is the quality of order execution after clicking the "Trade" button. The question arises: does your broker route orders to maximize your returns or its own revenue?

Essential Insights

• Regulation NMS mandates brokers execute trades at or better than the National Best Bid or Offer (NBBO).
• The NBBO represents the lowest ask price when buying and the highest bid price when selling exchange-listed securities.
• Some brokers route orders to earn exchange rebates and payment for order flow from market makers.
• Your broker’s order routing strategy can significantly affect your overall returns depending on whether it prioritizes price improvement or revenue generation.

Brokers’ Order Execution Regulations in 2024

Regulation NMS, established in 2005, requires brokers to fill orders at the NBBO or better, ensuring fair pricing for investors. This includes price improvements on market and marketable limit orders, offering better buy or sell prices.

Another key regulation, SEC Rule 606, compels brokers to publish quarterly reports detailing where customer orders are routed. While some brokers allow clients to select execution venues, most online orders are non-directed, meaning brokers decide the routing.

These reports disclose any venue receiving at least 5% of order flow and can be requested for personal order routing histories, though they can be complex to interpret.

Brokers differ in their approach: some prioritize generating rebates and payments for order flow, while others focus on obtaining the best possible prices for customers.

Critical Consideration

The venue and method your broker uses to execute trades directly influence your investment returns. Is your broker optimizing for your benefit through price improvement, or for its own profit via payment for order flow?

Execution Quality Data: Fidelity vs. Schwab in 2024

Fidelity and Charles Schwab regularly publish execution quality statistics comparing their order routing performance to the NBBO. Recent data from Q2 2021 highlights meaningful savings for customers trading S&P 500 stocks within 500-1,999 shares.

Fidelity

Fidelity customers in this trade size range saved an average of $11.17 per transaction.

Charles Schwab

Schwab clients saved an average of $15 per transaction within the same parameters.

For investors placing five such trades monthly, this translates to $55.85 in savings with Fidelity and $75 with Schwab, enhancing portfolio growth.

Fidelity and Schwab: A Competitive Debate

Following the elimination of commissions, Schwab challenged Fidelity's execution quality, citing concerns over Fidelity’s routing through its affiliate National Financial Services and acceptance of rebates and payment for order flow on options trades.

Fidelity counters that it does not accept payment for order flow on equity trades and operates a proprietary alternative trading system (ATS) delivering price improvements, especially for institutional trades. Approximately 3% of Fidelity’s trades execute on this ATS, generating 10% of total price improvement.

Regarding options, Fidelity initiates exchange auctions to secure price improvements, often involving market makers affiliated with consolidators like Citadel and Susquehanna.

A Fidelity spokesperson emphasized that routing decisions prioritize price improvement equally for equities and options. Fidelity reports accepting $0.22 per options contract in payment for order flow, compared to Schwab’s $0.35 and E*TRADE’s $0.39.

Industry insiders note brokers can refuse payment for order flow or pass it to clients, though none currently do so.

Critics of Rule 606 argue that it only reveals final execution venues, not the initial routing path. Both Fidelity and Schwab maintain strong execution quality, with client trading profiles differing across firms.

The Financial Information Forum’s Role

The Financial Information Forum, formed by brokers and market participants, began publishing execution quality reports in 2015. Initially, several brokers agreed to a unified reporting template, but currently only Fidelity adheres fully.

Schwab excludes large trades (5,000+ shares) from reports, citing differences in order types compared to Fidelity. Fidelity disputes these claims, accusing Schwab of selective reporting.

Both firms continue to publish their latest retail execution quality statistics for transparency.

• Fidelity Brokerage Services Retail Execution Quality Statistics
• Charles Schwab Retail Execution Quality Statistics

How Orders Travel from Your Device to the Market

Brokers generally use three routing strategies: routing to generate payment for order flow and exchange rebates (used by Robinhood and IBKR Lite), seeking price improvement while accepting payments (common among Schwab, TD Ameritrade, and E*TRADE), and prioritizing price improvement while rejecting payments unless qualifying (Fidelity's approach).

Robinhood asserts its routing favors market makers with historically best execution, though its unique reporting makes direct comparisons difficult.

Fidelity’s private ownership limits disclosure of revenue from commissions and routing, but the firm emphasizes transparency and price improvement as its core values.

Calls for Enhanced Transparency for Retail Investors

New institutional trading regulations are expanding Rule 606 disclosures to increase transparency around order routing and broker conflicts of interest. Experts argue similar measures should extend to retail investors.

Joe Wald, CEO of Clearpool Group, highlights that institutional clients receive full venue control and transparency, a standard not yet applied to retail customers.

Wald advocates for retail brokers to disclose how they profit from order flow, enabling investors to make informed decisions beyond commission costs.

As commissions become irrelevant, retail investors need clearer, honest data on execution quality and order routing to select brokers aligned with their investment strategies.

While such regulations are forthcoming for institutions, industry participants should proactively adopt transparent practices for retail clients to foster trust and better investment outcomes.

Explore useful articles in Brokers as of 06-10-2021. The article titled " Online Broker Execution Quality in 2025: Why It Matters More Than Fees " offers in-depth analysis and practical advice in the Brokers field. Each article is carefully crafted by experts to provide maximum value to readers.

The " Online Broker Execution Quality in 2025: Why It Matters More Than Fees " article expands your knowledge in Brokers, keeps you informed about the latest developments, and helps you make well-informed decisions. Each article is based on unique content, ensuring originality and quality.