Did you know that most retail stock orders never execute on an exchange? Most retail orders are "internalized" by a "wholesaler" or more aptly, an "internalizer", many of which claim they match retail buyers and sellers, and even give both buyers and sellers a little extra - something they call "price improvement".
On October 9, 2012 between 10:02:20 and 11:01:15, there were at least 449 bad prints in 253 stocks (view in google docs, or download it) which caused price spikes on charts. All bad trade prints were from NqTRF (dark pools) and ended in 0.xx40 or 0.xx60. At the end of the day, 437 bad trades were corrected with new prices, and 12 trades were outright canceled. Almost all of the corrected trades have new prices that differ from the original price by $0.444 which is bizarre.
Imagine buying a house. You do all the leg work: inspections, market analysis, etc. and arrive at a fair price which you then submit, in writing, to the seller. Suddenly, one second before closing, another buyer with special privileges shows up and offers the seller a penny more than you, and wins the property. The seller has no choice in the matter, they have to sell to the highest bidder. Think that is outrageous? It gets worse.
Analysis of sub-penny trade data doesn't support SEC's conclusions about internalizers as written in the final flash crash report. There is abundant evidence that internalizer software was acutely sensitive to the integrity of the consolidated feed and would switch off internal matching only if and only when the quote was crossed. Furthermore, short term volatility had little, if any impact on the number of sub-penny trades. About the only thing our findings have in common with the SEC report on this matter, is that the date in question was May 6, 2010.
August 1, 2012 marked the start of NYSE's new Retail Liquidity Price Improvement (RLP) program. Retail order flow would be directed to special Retail Liquidity Providers who would offer a better prices for retail trades in whole 1/10th of a cent increments.
The image below was created by taking all trades that have prices requiring 3 or 4 decimals places and grouping them into 99 bins by using the last 2 digits of the price. For example, a trade with a price 27.6501 goes in bin 1, and a trade with a price 62.5463 goes in bin 63.
Well this is unexpected. Chart 1 below shows total volume for stock trades by fraction of a penny. The top pink/red line represents total share volume for prices 1/100th of a cent from nearest whole cent. The cyan/blue line below that is the total share volume for prices 2/100th through 9/100ths of a cent from the nearest whole cent. If there were healthy competition, the cyan/blue line should be above the pink/red. And we should see a better distribution of trades at 2/100 through 9/100.
On July 24, 2012, at 09:31:28 Eastern time, a 100 share trade of AAPL crossed the tape at a price of 609.1499 for a transaction value of $60,914.99. At the time of the trade, the national best bid/offer (NBBO) was 609.00 bid and 609.15 offer. This indicates an investor (Investor A) bought AAPL for $0.0001 (1/100th cent) less than the prevailing offer of 609.15: a total savings of 1 penny on a $60,915 transaction. This is called price improvement.
We recently grouped all trade execution reports priced with 3 or more decimal places into 100 different bins by using the 2 digits that represent hundredths of a penny. We only include trades priced above $5 from NYSE, ARCA, and Nasdaq listed equities. For example, a trade with a price of 27.8099 is added to bin 99 (last 2 digits), while a trade with a price of 56.2520 is added to bin 20. We did this to see if anything interesting came out of the data (and found quite a surprise!)
In case anyone missed the memo, the use of market orders practically guarantees poor fills. Use of limit orders practically guarantees that you will have to wait minutes, hours, or forever for your fill, because a market maker has jumped in front of your order by 1/100th of a cent in order to give the retail customer a (slightly) better price. But limit orders are another topic.