Execution Speed

Execution speed is the time it takes for a broker to complete a trade – from the second that the order is placed, to when it is executed on the live market. It is an important factor to consider when day trading. In fact, when the market is at its most volatile, it could mean the difference between profit and loss. In this guide, we’ve ranked the best brokers for execution speed and also explain how and why speed can be so important.

Some parts of the order execution chain are outside the broker’s control, but we’ll look at the local factors that you can manage yourself. Also be aware that the quality of execution may be a better metric for improving your trading. Order quality covers a number of variables, including speed, price and likelihood of execution, ultimately measuring whether you got the best trade possible.

Order Execution Speed Explained

Why is a Broker with Good Execution Speed Important?

The best investors know that execution speed is vital for securing their intended trades in volatile markets. Let’s look at an example scenario to see the effect it can have.

Medium-cap company, Alfresco, has hit the news headlines for securing a deal with the world’s largest e-commerce retailer. As more details trickle through the media outlets, the stock price starts rising dramatically, from $2.00 to $4.00 in a matter of minutes.

You place a buy order for 1000 shares at $4.08, with a stop-loss set at $4.50. A direct market broker may fill your trade at $4.08, meaning when the price jumps to $5, you’ve made a profit of $920 (1000 x $0.92). If your retail broker was slow to the mark, filling at $4.50 – your profit is only $500 (1000 x $0.50). You’ve lost $420 ($920 – $500) by trading with a broker with poor execution speeds.

Execution speed is measured in milliseconds (with the unit, ms). Anything less than 100 is considered excellent, anything more than 200 is fairly poor and could lead to price slippage or failure.

Should You Be Monitoring Your Broker’s Execution Speed?

Execution times can vary depending on a number of factors:

• Market
• Location
• Time of Day
• Size of Trade
• Connection Speed
• Refresh Rate
• Regulation
• Hardware
• Volatility
• Volume
• Policy

This vast array of factors makes it difficult to assess accurately. In fact, order size and market conditions are crucial elements to take into account, meaning a broker execution speed comparison is almost impossible to perform with any certainty.

This is where execution quality comes in.

Execution quality uses speed as just one metric for assessing a broker’s performance. But it also uses other factors, like price, their business model, and much more.

In this article, we’ll explain how we came up with our own broker execution ‘Quality & Efficiency’ rating and explain why it’s a better metric for assessing performance than speed alone.

How We Scored Our Brokers On Their Execution Speeds

• Brokers Statistics – Many of the top brokers publish their execution statistics on their website. This has enabled us to rank many based on the transparency of execution as well as the figures provided.
• In-House Tests – We also perform a range of tests in-house to validate each broker’s numbers. Our recommended firms consistently executed at a sufficient quality to match – or exceed – our internal benchmarking criteria.
• Client Feedback – As experts in our field, we regularly seek feedback from our clients and colleagues on their experiences.
• Extensive Research – We keep our finger on the pulse to ensure that the information we’re offering is up-to-date and valuable.

How The Market Works

Broker Business Models

There are a few ways that a broker can structure their business and facilitate trading. Depending on their model, they can choose how to route your trade, as long as it fulfils the requirements you’ve set. Therefore, the model used by your broker can impact execution speed as they may be incentivised to fill your trade through a less efficient route.

• Exchanges – An exchange is a marketplace of buyers and sellers who are matched together to form a trade. Just like an online marketplace for selling second-hand goods, buyers and sellers come together in an exchange to agree on a trade. The company acts as a facilitator only.
• Market Makers – A market maker actually creates, or maintains, the market for a particular asset. This means they have two options to fill a trade:
  1. Find an interested party on their order book
  2. If no one else wants to buy what’s being sold, they’ll take the trade to create the marker
• On occasion, a market maker might compensate a broker for sending orders via their market. Referred to as ‘payment for order flow’, these payments may mean a broker is routing your trade through a slower path in order to make extra cash before securing the best prices for their clients. More on this below.
• ECN (Electronic Communication Network) – An ECN broker electronically communicates an order to a larger exchange where buyers and sellers are already waiting to take the trade. It is usually quick to process.

Brokers may have different priorities depending on their model and speed of execution may not always be at the top of their list, therefore execution quality may be a better metric.

What Is Payment For Order Flow (PFOF)?

Payment for Order Flow is the fee that a broker receives for routing trades to certain market makers. It’s the transfer of profit to the brokers selling the trades from the market makers who will execute them. Small trading brokers will usually operate in this way, as it allows them to sell positions to the bigger market makers that specialise in certain assets.

Clients are often not aware that their broker is routing trades in this way, profiting from slowing their trade execution speed – unless they are told by the broker. For this reason, PFOF has been largely controversial as investors’ best interests are not always the priority.

In 2005, the SEC even went digging into the issue, aiming to increase transparency by introducing Rule 606.

SEC Rule 606

SEC Rule 606 requires that brokers publish a quality report, providing a general overview of their routing practices. By doing this, investors can discover exactly how brokers make cash from their trades and if any conflicts of interest arise on the way.

Over the years, the requirements on these reports have changed to ensure that investors can access the information they need. In 2020, the SEC made it mandatory for brokers to publish the net PFOF payments they make each period from market makers. This covers trades executed in S&P 500, non-S&P 500 equity trades, and options.

Financed Information Forum (FIF)

The Financed Information Forum is a group of brokers and market makers that aims to standardise the reporting required as part of the SEC 606 Rule. The group found that the reports created were not giving retail investors transparent information, so they introduced the following requirements.

Each report should contain the metrics below:

• Average size of orders, in shares, within each range
• Percent of shares in market orders that were executed at current market quote or better
• Percent of shares in market orders that received price improvement
• Savings received on an average order as a result of price improvement
• Average execution speed, in seconds, between order routing and trade execution

Note, you can find a list of the FIF members on their website.

National Best Bid Or Offer (NBBO)

Another SEC mandate aimed at protecting retail investors is the National Best Bid or Offer (NBBO). This regulation requires brokers to trade at the best available ask and bid prices when executing positions for US investors.

The NBBO is calculated from a composite of prices across all exchanges and market makers (excluding alternative markets). However, due to the nature of live markets, this is extremely difficult to calculate and it is almost impossible to know for sure whether a trader actually received the NBBO, meaning holding brokers accountable to this is tough.

Alternative Trading System

But, one thing to be aware of is that Alternative Trading Systems (or ATS) are not included in the NBBO, so what is an ATS?

An ATS is a venue for trading that has less stringent regulation than an exchange. In Europe, they’re known as multilateral trading facilities. An example of an ATS is an ECN (electronic communication network) broker – one of the most popular broker types in the US. ECN brokers electronically match buy and sell orders.

Importantly, ATS transactions do not show on national exchange order books, so are often used by traders making large institutional moves to conceal the size of a trade and prevent it from impacting the price of an equity.

Broker vs Market Maker

A broker is a party that facilitates trading by bringing together a buyer and seller. They have the authorisation to buy or sell on behalf of their clients from larger institutions that hold the assets. In most countries, brokers must be regulated by the national body that protects financial services e.g in the UK, this is the Financial Conduct Authority (FCA), or in the US there is Financial Industry Regulatory Authority (FINRA).

A market maker is an organisation that creates a market for an asset by taking a trade. Sometimes these firms can facilitate a trade by finding an opposing party on their order book i.e someone else wants to buy what you’re selling. However, crucially, if there’s no one to take the other side, they’ll form the trade themselves.

Note, a market maker can also be a broker, but brokers are not always market makers.

What Impacts Execution Quality?

Now that we understand how markets work, we’ll look at the factors that impact execution quality and speed. These can be variables between brokers, or the trades themselves.

• The Asset – The asset traded can impact the quality of the trade. There are lots of reasons why this might be the case. One example is that legal restrictions on assets in some jurisdictions could mean the best price is not achieved e.g cryptocurrencies are restricted in the US, meaning that traders may not get the best order compared to those in more freely regulated countries. Alternatively, the infrastructure may not be as robust on certain assets, e.g trading an exotic forex pair vs the Cable (GBP/USD), one of the most liquid assets in the world, will not be the same experience.
• The Time – If you’re trading during busy periods, the ‘load’ on the ordering process at your broker may be constrained. Just like your wifi slows when everyone gets home from work and logs on to their home wifi, a broker’s order execution speed may slow during the most liquid times of the day.
• Order Type – Limit orders and market orders will behave differently. In the case of a market order, speed is key and price is less crucial. A market order will go through regardless of price, but the aim is to execute at the market value at the point of order. With a limit order, price is key. The trade will not execute unless the asset’s value meets the price requirement specified. The quality of the trade will depend on what is important to you. Clearly, an unexecuted limit order is poor execution, and a market order processed late and way off the original price is also unacceptable.
• Size – Size of trade and the size of your broker both matter when it comes to order execution time. Put simply, small brokers may struggle to process large trades.
• Volatility – When a market is volatile, prices are moving fast and in large quantities. Even the most experienced brokers may struggle to fill trades to a high standard when this occurs.
• Liquidity – A broker’s liquidity providers could also impact the quality of your trade. Are they backed by institutional partners that will have no problem filling trades even while the market is hot? If not, expect to see downgrades in execution speed and quality during this time.
• Brokers’ Revenue Streams – If we look back at the business models we referenced above, we note that some brokers will have a profit incentive for diverting trades through certain routes. The best execution speeds will not be achieved if this is the case. Therefore, it’s important to understand if your broker receives payment for order flow (PFOF). You’ll be able to identify this by finding their SEC Rule 606 report.
• Likelihood Of Execution – Traders worldwide will know the pain when a stop-loss order fails. The chance of this happening should be low if your broker is operating successfully, but the likelihood of execution is just as important as speed in this instance.
• Price – Ultimately, one of the best indications of execution quality is price. If you’re solely focused on speed, you may be missing that a quick deal does not guarantee the best price.

What Else Impacts Execution Speed? – Local Factors

On top of the variables above, local factors also impact execution speed. These are unique to you as a trader and not impacted by the broker or the position that you choose.

• Internet Connection – A slow internet connection will inevitably impact whether you get the best execution speed. Measure yours using free services like Fast.com. Anything above 25 Mbps is a sensible internet speed, but 100 Mbps or above is ideal for scalping.
• Spec Of Device – Similarly, if your device’s processor is old and slow, you’ll find it difficult to execute trades quickly. If your internet connection is good and you’re still having trouble, consider updating your device to speed up execution times. Important things to look for are the speed of your CPU (Central Processing Unit), size of RAM (Random Access Memory) and hard disk space.
• Other Software & Services – Issues with software can also make a difference. Make sure all browsers, apps and desktop downloads are operating on the latest versions.

What Can You Do?

• Execution Guarantees – Some brokers may offer execution guarantees which mean they promise to fulfil your order. Guaranteed market orders do not ensure you’ll get the price quoted, so slippage can be an issue if the execution speed isn’t lightning fast. Stop-loss guarantees are harder to come by, but they’ll make a significant impact on your strategy if you find them. While they’re not available at many of the top brokers like Fidelity or TradeStation, there are some that provide them on certain assets. IG, for example, allows guaranteed stops on spread bets and CFDs.
• Free Trade If Fails – If your execution cannot be guaranteed, is there another form of compensation that your broker offers? Free trades if an order fails are a great way to make up for the misstep on their part.
• Pick The Right Stocks – Trading the most liquid stocks is more likely to guarantee faster execution speeds, and therefore, better prices. This happens because trades that can be filled from a broker’s own order book do not need to be routed externally. A shorter route means a quicker turnaround. Therefore, if you’re trading Cable or EUR/USD, you’re much more likely to get an order filled quickly than if you’re trading an exotic pair.
• Order Size – Brokers will look at the size of the trade before deciding how to route it. If your trade is too large, some may struggle to fill it straight away and will route it externally. If you do want to trade an illiquid asset, be mindful of the impact your order size has on execution quality.

Final Thoughts

Whilst execution speeds are a useful metric to assess, their complexity and exposure to external factors mean they shouldn’t be reviewed in isolation. Our broker assessment looks at more than just speed, instead focussing on quality as a whole. Try out one of our recommendations to get started.

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