In the furor surrounding last year’s best-seller Flash Boys, by Michael Lewis, many retail investors were spooked by the book’s claim that high-frequency traders use their technology edge to pick off the little guys, who, the author claims, were “easy kill” for the professionals. That part of the story was just wrong. While some institutional traders have fallen behind in the computer arms race, the evidence shows that retail traders enjoy some of Wall Street’s best prices on their stock orders. Surprisingly, the little guy’s advantage has grown in the past couple of years.
“The retail trader has never had it better,” says Robert Battalio, a finance professor at the University of Notre Dame who wasn’t afraid to criticize stockbrokers at Senate hearings amid the Flash Boys debate. “When you place a market order today, you pay a lower commission, you get an immediate confirm, and very rarely are you getting worse than the price you saw when you pushed the button,” he says. • The competition for retail traders’ orders actually yields a price that’s better than the published quote, on average, when small investors go to buy or sell at the market price. The resulting savings can be trivial or as large as a discount broker’s commission, but across the industry, these price improvements were worth almost $600 million to individual investors last year, according to financial-market analytics firm RegOne Solutions. That’s much less than the billions paid out in commissions, but it’s hardly chump change. As irony would have it, these savings mostly result from the computerization of market makers and retail brokers.
The public has never seen much information on which firms do the best job executing stock trades. So Barron’s spent months analyzing trade-quality reports of the big “wholesale” market makers, where discount brokers send most buy orders to find a matching sell, and vice versa.