Best execution is a broker/dealer's obligation to seek the best terms reasonably
available when executing a transaction on behalf of a client. While there is no one
standard of what determines best execution, speed of transaction, execution price,
price improvement opportunities and liquidity are typically listed by our clients as
the factors that are most important to them. Simply put, most of our clients want their
orders filled in their entirety, as fast as reasonably possible, and at the price they
were quoted or better.
What factors go into determining best execution?
There are numerous factors that can affect the terms of execution. The most common
factors include, but are not limited to: current market conditions, volatility, size and
type of order, the number of available primary markets for a particular security, the
number of primary markets checked and likelihood of execution.
Are all brokers obligated to seek best execution?
Yes. Brokers are obligated to seek the best execution that is reasonably available
under current market conditions for their clients' orders. They must regularly and
rigorously evaluate the orders they receive to determine which markets, market makers,
or Electronic Communication Networks (ECNs) offer the most favorable terms of execution. Order-routing practices should then
be modified based on this information.
Do brokers vary in how they seek best execution?
Yes. Just as you have a choice of brokers, your broker generally has a choice of markets
to execute your trade. Brokers may automatically route certain classes of orders to specific
market centers, to ECNs they own, or they may internalize
the trade by selling you stock out of their own inventory. Automatic routing of certain classes
of orders is allowed, as long as the broker routinely reviews execution quality.
What is the National Best Bid and Offer (NBBO)?
NBBO is the consolidated quotation for a single security that is representative of the
highest bid price available and the lowest offer price available among participating quoting
market centers.
How are regular session orders handled when entered prior to the market opening?
Regular market session trading occurs from 9:30 a.m. - 4:00 p.m. ET. Depending on the security and the manner in which submitted, TD AMERITRADE routes all marketable orders for National Market System securities (NASDAQ, NYSE and AMEX), received prior to 9:28 a.m. ET, to either the primary market center or destinations that participate in the NASDAQ Opening Cross "NOOP". NASDAQ uses the NOOP process to centralize order handling and provide a single and transparent price for the market open on all NMS securities. Orders received after 9:28 a.m. ET until all markets are open are handled on a best efforts basis which may include participation in a NYSE or AMEX opening print. Information about the NOOP can be found on NASDAQ Web site.
Please note that TD AMERITRADE reserves the right to change its routing of orders in response to market conditions and consistent with its obligation to seek best execution for your order.
How are Market On Close (MOC) orders handled?
MOC orders are market orders designed to execute at the close of the market. TD AMERITRADE
accepts MOC orders until 3:40 p.m. ET. For Listed MOC orders, market centers utilized by TD
AMERITRADE execute at the last print of the day. For NASDAQ MOC orders, market centers utilized
by TD AMERITRADE execute at the NASDAQ Official Closing Price (NOCP). More information about
the NOCP can be found on the NASDAQ Web site.
What is direct routing?
Direct routing allows you to select a routing destination for your stock or options order.
Direct routing gives you the flexibility to direct equity orders to any of the market makers or
ECNs we offer direct routing to, or options orders to multiple option exchanges. Unlike some brokers, TD
AMERITRADE does not charge extra for this service.
What is a fast market?
A fast market is a market with excessive volatility, which may reduce the likelihood that
you will receive the price you saw when you entered your order. Typically, a fast market is
evidenced by the quote updating faster than trading can occur — usually due to events such
as news or other economic factors that affect the valuation of the underlying security.
What is a market center?
A market center is a place where order executions occur. In today's marketplace, there
are hundreds of different market centers that execute orders. These market centers vary from
ECNs that electronically match buyers and sellers, to exchange floors with human specialists
that hold auctions. These markets all provide prices on individual securities, which then
make up the NBBO.
Are all market centers automated?
No, even in today's highly electronic environment, not all market centers are automated.
Some market centers employ specialists on a floor where trading is still conducted in a manual
environment. Trading that takes place on exchange floors can sometimes take minutes to complete.
TD AMERITRADE attempts to utilize automated markets whenever possible, but there may be
circumstances where it is not possible.
What is internalization?
Internalization is the practice of a broker sending a client's order to another division
or affiliate of the broker's firm to be filled out of the firm's inventory. This allows the broker's firm
to make money on the "spread" or difference between the purchase price and sale price.
How does TD AMERITRADE route orders?
We route orders through our proprietary, sophisticated order-routing technology, which allows us to dynamically distribute orders to
multiple market centers in an effort to obtain best execution. In addition, we continually
and routinely monitor our execution quality to make improvements that will benefit our clients.
We employ many metrics, including price, speed, liquidity and opportunities for price improvement,
to assure that order flow is directed to markets that provide best execution for our clients.
Do brokers receive compensation for routing orders to particular market makers?
Yes. The majority of exchanges and market makers provide incentives for brokers to route
orders to them. Typically, this involves a rebate or payment to the broker for routing orders
to that exchange or market maker. This is commonly referred to as payment for order flow.
Does TD AMERITRADE receive payment for order flow?
TD AMERITRADE, Inc. receives payment for order flow from some market centers. This payment
is used to offset the costs of doing business and ultimately helps to reduce the overall cost
to our clients.
How is the speed of execution measured?
There are five basic points to an execution: broker receives order from client, broker
routes order to market center, market center acknowledges order receipt, order is executed
by market center and order confirmation is displayed to client. We believe it is important
to measure the time elapsed between when we route an order to a market center and when that
order is executed by the market center (common measure of execution speed). We also measure
the total time from when we receive an order from a client to when an order confirmation is
displayed to a client. Only these two measurements involve your broker's systems AND only
the latter is a measure of your WHOLE experience as a client. TD AMERITRADE reports both of
these times to you so you can make an informed decision on best execution. Some brokers only
report the market center speed of execution to their clients (market center acknowledges order
receipt to order executed by market center). While this measure is important, it only measures
the speed of the market center, not your broker's speed.
Why is the speed of execution important to me?
Stock prices can change quickly. In fact, in fast-moving markets, by the time your order
reaches the market, the price of the stock could have changed. A faster order execution increases
the likelihood that your order may be filled at the price you were quoted.
What is price improvement?
Price improvement is the opportunity, but not the guarantee, for an order to be executed
at a better price than the NBBO. The amount of improvement can vary from fractions of a penny
per share to whole pennies over the NBBO.
Do all orders receive price improvement?
No. Not every order receives price improvement.
What is auto-execution?
Auto-execution is a threshold established by a liquidity provider (market maker) that allows
for the automated execution of orders regardless of the actual displayed size on the NBBO. In an
attempt to increase the likelihood that your order is executed in its entirety, TD AMERITRADE
routes orders to numerous liquidity providers that offer auto-execution. Auto-execution, however,
is never guaranteed. It can be decreased or discontinued at will by the market center.
How does liquidity benefit me?
Let's assume that you want to buy 500 shares of ABCD at the market. The best quote available
indicates that there are only 100 shares offered. Since TD AMERITRADE routes orders to numerous
liquidity providers that offer liquidity (or shares) over and above what the quote indicates, the
likelihood that your order is executed in its entirety is increased. Some systems may only offer
the displayed quote size, meaning that by the time your order is filled, not only did you receive
many partial executions, they may have been at prices higher than what was displayed when you
originally entered your order.
Does TD AMERITRADE actually execute trades themselves?
No. TD AMERITRADE is not a market maker and does not internalize client orders. We dynamically
assess multiple market centers and distribute your order to the market center that, based on our
analysis, generally should deliver best execution.
Since I'm using an online brokerage, do I have a direct connection to the market?
No. When you place an order, it is sent over the Internet to your broker. The broker then
decides which market to send it to for execution. A similar process occurs when you contact
your broker via phone to place a trade.
What if my trade doesn't execute at or within the NBBO?
TD AMERITRADE utilizes execution reporting technology to identify orders executed outside
of the NBBO during the course of the trading day. In some instances, executions outside of the
NBBO are justified based on excessive trade volume on a particular security or market volatility.
If not justified, follow-up action may be taken on your behalf to request price adjustments from
the market maker or market center.
