Price improvement is a practical execution concept that describes receiving a better transaction price than the best publicly quoted price at the moment your order is eligible to trade. It is a byproduct of competition for order flow, market design, and the incentives offered to liquidity providers. Understanding what price improvement means, how it is measured, and where it comes from helps traders interpret fills, execution quality statistics, and trade confirmations.
What Price Improvement Means
In quoted markets there is a best bid price and a best ask price. The difference is the bid ask spread. In the United States equity markets the National Best Bid and Offer, often abbreviated NBBO, aggregates the highest displayed bid and the lowest displayed ask across exchanges. An order that executes at a price better than the NBBO is said to receive price improvement.
For a buy order, any execution below the prevailing best ask is price improvement. For a sell order, any execution above the prevailing best bid is price improvement. In some systems, midpoint executions are common. If the NBBO is 10.00 by 10.02, a midpoint execution would occur at 10.01, which improves the price for both buyer and seller relative to the quotes.
Price improvement is typically measured per share or per contract. A broker might report that a 500 share buy order received 0.003 dollars per share of price improvement relative to the NBBO at order receipt. Multiplying the per share improvement by shares executed gives a dollar estimate of the improvement on that fill.
Why Price Improvement Exists
Price improvement exists because market participants compete to execute orders, and they are willing to give up part of the spread to attract or internalize that flow. Several forces contribute:
Order flow segmentation and information content. Some order flow, especially smaller retail orders, tends to be less informed about very short term price moves than institutional flow. Liquidity providers are often willing to share part of the spread with this flow because the perceived adverse selection risk is lower.
Internalization and wholesaling. In many equity markets, retail brokers can route marketable orders to wholesalers, also called internalizers. These firms may execute against their own inventory or against other liquidity and provide a slight price improvement relative to the NBBO.
Dark liquidity and midpoint matching. Alternative Trading Systems and dark pools match orders without displaying quotes. Matching at the midpoint of the NBBO is common. This creates automatic price improvement for both sides when compared with trading at the bid or the ask.
Exchange programs. Some exchanges operate retail price improvement programs. Market makers post hidden interest that is better than the NBBO by a small amount, and eligible retail orders can interact with it. This is designed to bring price improvement to the exchange environment.
Tick size and sub penny execution. Quoted prices for most U.S. stocks priced at one dollar or more move in minimum increments of one cent, but executions can occur in sub penny increments in specific circumstances. That allowance makes fractional price improvement possible for equities. Options generally cannot execute in sub penny increments, so option price improvement typically occurs in one or more tick increments.
How Price Improvement Is Measured
There are several related measures. They share a common idea, which is to compare the execution price to a benchmark at the time the order became marketable or at the time it was received.
Absolute price improvement per share. For a buy, this is the best ask at the relevant time minus the execution price. For a sell, this is the execution price minus the best bid. If a buy order executes at 20.015 when the best ask was 20.02, the improvement is 0.005 dollars per share.
Dollar value of improvement. Multiply per share improvement by the number of shares filled. If the 0.005 improvement applies to 2,000 shares, the total is 10 dollars.
Percentage of orders improved. Brokers and venues often report the fraction of eligible orders that received any improvement, and the average amount. This can be useful when comparing execution quality across time or providers, although differences in client order characteristics can make comparisons imperfect.
Effective spread and midpoint metrics. The effective spread is two times the signed difference between the execution price and the midpoint of the NBBO at the relevant time. If a buy executes at the midpoint, the effective spread equals zero and both sides received price improvement relative to the quotes. Traders and regulators use effective spread to assess how much of the quoted spread is actually paid.
Time reference. Some methodologies use the NBBO at order receipt, others use the NBBO at time of execution, and some use both. The choice can affect the reported improvement if the market moved while the order was pending.
Where Price Improvement Comes From in Practice
Modern markets offer several venues and mechanisms that generate price improvement.
Wholesalers and internalizers. Retail brokers frequently route marketable equity orders to wholesalers. These firms often fill a portion internally at a price slightly inside the spread. The improvement is usually small on a per share basis but can be meaningful over many orders. The wholesaler may manage risk by hedging the position on exchanges or by adjusting quotes elsewhere.
Alternative Trading Systems and dark pools. Many ATSs match orders at the midpoint, or at other prices within the spread. Midpoint crossing is an important source of improvement because it benefits both sides equally relative to the NBBO.
Exchange auctions. Opening and closing auctions, as well as periodic intraday auctions, can deliver prices that are better than the prevailing quotes for one side of the market. In options, specialized auctions are designed to solicit price improvement, such as Price Improvement Periods or auctions that allow price responses better than the displayed market.
Retail price improvement programs on exchanges. Some exchanges allow designated participants to post hidden interest that offers a small improvement over the NBBO. Eligible orders interact with this liquidity when it is available.
Displayed quotes and competition. Even in the lit markets, participants sometimes step ahead by quoting inside the spread within permitted tick rules. The willingness to step in, combined with speed and queue position, can lead to fills that are marginally better than the previous best price.
Order Types and Their Interaction with Price Improvement
Order type shapes the opportunity for price improvement, although improvement is never guaranteed.
Market orders. A market order to buy will execute against available offers. If routed to a wholesaler or a midpoint venue, it may receive a price better than the best ask. If it is routed only to exchanges, it generally pays the best ask unless hidden or midpoint interest is available. Similar logic applies to market sell orders.
Marketable limit orders. A limit buy at or above the best ask, or a limit sell at or below the best bid, is marketable. It can receive price improvement for the same reasons as a market order. The limit price caps the worst acceptable price but does not prevent an execution at a better price.
Non marketable limit orders. A buy limit below the best bid joins the bid queue. If a counterparty steps in within the spread, or if a midpoint or hidden order interacts, the execution can occur at a better price than the displayed bid. Fill probability and queue position become important. The interaction with hidden midpoint liquidity is a common path to improvement for passive orders.
Stop and stop limit orders. After a stop is triggered, the resulting order behaves like a market or limit order and can receive improvement if the routing and venue conditions allow it.
Options orders. In listed options, most classes enforce minimum tick sizes of one cent or five cents depending on the series. Price improvement occurs in discrete ticks, often facilitated by auction mechanisms that solicit responses better than the prevailing quotes. Sub penny executions are generally not permitted in options.
Foreign exchange spot and CFDs. In dealer markets, the concept is similar, but there is no centralized NBBO. Improvement is measured relative to the dealer's quoted price at order acceptance or relative to a benchmark feed. The mechanics depend on the venue and product rules.
Illustrative Scenarios
Consider an equity with an NBBO of 10.00 bid and 10.02 ask.
Scenario 1, market buy routed to a wholesaler. A retail investor submits a market order to buy 300 shares. A wholesaler fills the order at 10.019. The per share improvement is 0.001 dollars relative to the best ask, for a total of 0.30 dollars. The improvement is small, but it is strictly better than paying 10.02.
Scenario 2, midpoint execution. The same buy order is matched in an ATS at 10.01. Both buyer and seller capture half of the quoted spread. For the buyer, the improvement is 0.01 per share relative to 10.02. For the seller, who would have sold at 10.00, the improvement is 0.01 per share as well.
Scenario 3, partial fills across venues. A 2,000 share marketable limit buy is routed across several venues. The first 500 shares execute at 10.02 on an exchange. Another 1,000 shares execute at 10.015 in an ATS, and the remaining 500 shares execute at 10.02. The average execution price is 10.01875. Relative to paying the full ask for all shares, the order received a blended improvement of 0.00125 per share on average.
Scenario 4, non marketable limit improving the book. A buy limit at 10.01 posts inside the spread. A seller accepts that price, and the trade executes at 10.01. The buyer improved their prospective price versus the 10.02 ask. This is not called price improvement relative to the NBBO at the moment of execution, since the order itself helped set the new best bid, but it demonstrates how the spread can compress and why others sometimes step in between the quotes.
Scenario 5, options auction. The NBBO for a call option is 1.00 bid by 1.05 offer. A broker routes a marketable buy order into an exchange's improvement auction. Market makers respond and the order executes at 1.03. The buyer receives two cents of price improvement relative to the displayed offer, within the rules of the options tick size.
Factors That Influence Price Improvement
Several observable factors correlate with the likelihood and size of improvement.
Spread width and tick size. Wider spreads create more room for midpoint or sub penny improvement. Stocks priced very low or tick constrained names can exhibit different patterns, since the minimum tick can be large relative to price.
Order size. Small orders can be easier to execute inside the spread because there is often limited size available at improved prices. Large orders are more likely to sweep the book or to be split across venues, which can reduce average improvement.
Time of day and volatility. Opening minutes and periods of high volatility often show wider spreads and faster quote changes. Improvement can be available but fill risk and price movement risk increase. Midday periods in liquid names may offer steady midpoint liquidity but typically in smaller sizes.
Routing logic and venue access. Access to wholesalers, ATS midpoint books, and exchange RPI programs can affect outcomes. Some routers prioritize speed and certainty of fill, others seek midpoint interactions first. The router's preferences and the order's instructions shape the opportunity set.
Information signals. If an order is likely to be informed, liquidity providers demand more compensation for adverse selection. They may offer less improvement or none at all. Conversely, perceived low information content can attract more willingness to step inside the spread.
Hidden and odd lot liquidity. Hidden orders and odd lot interest at prices inside the spread are common. Interaction with this liquidity can create improvement, but it is often size limited and fleeting.
Benefits and Trade Offs
Price improvement directly lowers execution cost relative to paying the full spread. Over many orders, even small per share improvements can accumulate. The concept also interacts with several trade offs:
Certainty and speed of execution versus potential improvement. Routing that seeks midpoint or hidden liquidity may delay execution. If the market moves away during the search, the outcome can be worse than taking the displayed quote immediately.
Market transparency. Internalizing and dark executions can reduce displayed liquidity on exchanges. While this may benefit an individual order, it can affect overall price discovery. Regulators and venues regularly evaluate this balance.
Fees and rebates. Exchange fee models and payment for order flow arrangements affect routing incentives. Price improvement statistics alone do not describe the full economic outcome, since fees, rebates, and spreads all contribute to total trading cost.
Fill quality dispersion. Reported averages can hide variation. Some orders receive significant improvement, others none. The distribution depends on symbol, time, order size, and market conditions.
How Brokers Report and How to Interpret It
Many brokers include a line on trade confirmations that shows the amount of price improvement, often expressed in dollars per share and in total dollars. The calculation typically references the NBBO at order receipt. If the market was moving quickly, the improvement relative to the NBBO at execution may differ from the reported figure.
Execution quality reports required under U.S. Regulation NMS provide additional context. Rule 605 reports include statistics on effective spreads, rate of price improvement, and other execution outcomes for covered market centers. Rule 606 reports show how brokers route orders across venues, including the percentage routed to wholesalers, exchanges, and ATSs. These reports allow comparisons across brokers and venues, subject to differences in client base and order characteristics.
When reading broker materials, note whether the figures refer to shares or orders, whether they are weighted by order size, and what time reference is used. Also note any exclusions, such as removing opening and closing auctions or filtering out orders below a certain size.
Regulatory Framework and Market Rules
Rules vary across jurisdictions, but several themes are common.
Best execution obligations. In the United States, FINRA Rule 5310 imposes a duty of best execution on brokers. They must seek the most favorable terms reasonably available under the circumstances, which includes price, speed, and likelihood of execution. Price improvement opportunities can factor into that assessment.
Order protection and NBBO. Regulation NMS Rule 611 protects displayed top of book quotations. Brokers and venues generally must avoid trading through a better displayed price on another exchange. Price improvement typically occurs at prices inside the protected top of book.
Sub penny rules. Rule 612 restricts quoting in sub penny increments for equities priced at one dollar or more, but allows certain sub penny executions. This is the foundation for fractional improvement inside a one cent spread.
Exchange specific programs. Retail price improvement programs on some U.S. exchanges, as well as various options auction mechanisms, are governed by detailed rule filings. Participation usually requires specific order markings and eligibility criteria.
International contexts. Under MiFID II in the European Union and similar rules in the United Kingdom, best execution and tick size regimes shape the availability of price improvement. Some venues permit midpoint dark trading under size and transparency rules that differ from the U.S. framework.
Price Improvement Within Transaction Cost Analysis
Traders often analyze execution costs using measures such as implementation shortfall, which compares the final execution cost to a benchmark price at decision time. Price improvement affects the micro level component related to spread and market impact. Receiving improvement reduces the effective spread paid and can lower implementation shortfall, holding other factors constant. However, it does not eliminate the risk of price movement between decision and execution, nor does it address slippage due to partial fills and market impact for larger orders.
Common Misconceptions
Several misconceptions recur in discussions about price improvement.
Receiving improvement does not imply a better outcome than the market's future path. Improvement is measured relative to a contemporaneous benchmark, not relative to where the price trades later. A fill at the midpoint can still be followed by adverse price movement.
Improvement is not the same as a rebate or fee discount. Fees and rebates are separate from the execution price. A small per share improvement can be offset by fees, or enhanced by rebates, depending on the venue and fee schedule.
Improvement is not guaranteed. Even flow that often receives improvement will sometimes pay the full spread, especially in volatile conditions or when size is large relative to available liquidity.
Improvement statistics are not fully comparable across brokers or time. Differences in client order size, symbol mix, routing logic, and market conditions can produce different outcomes. Averages can mask substantial variation.
Practical Context for Trade Management
Price improvement is one component of execution quality. It interacts with other priorities such as speed, certainty of fill, and information leakage. When evaluating fills in practice, consider whether the order type and routing instructions aligned with the time sensitivity and size of the trade. Recognize that partial fills across venues can produce a blended outcome in which some slices receive improvement and others do not. For recordkeeping and analysis, it is useful to retain timestamps, NBBO snapshots, and venue information so that improvement can be calculated consistently.
Putting the Concept in Real Market Context
In active equities, a large portion of retail marketable orders receive some degree of price improvement through wholesaler fills or midpoint interactions. In highly liquid symbols with a one cent spread, sub penny improvement will often be a fraction of a cent. In names with wider spreads, midpoint executions can yield several cents of improvement per share, though available size may be limited. In options, improvement typically occurs in one or more ticks during auction processes, and availability depends on series liquidity and market maker participation. Across products, price improvement is episodic and sensitive to market conditions, particularly during macro announcements, earnings releases, or other events that increase uncertainty.
Limitations and Edge Cases
There are scenarios where price improvement is unlikely or not meaningful. Securities trading at very low prices can be constrained by tick sizes that are large relative to price. Thinly traded names may have little or no midpoint or hidden liquidity. During fast markets or halts, the NBBO can change rapidly or even be unavailable, which complicates measurement. Some order types, such as immediate or cancel instructions that restrict routing, can reduce the chance of midpoint interaction. Finally, odd lot orders in certain systems do not establish the NBBO, so interactions with odd lot interest inside the spread can be invisible to some benchmarks.
How to Verify and Calculate Price Improvement Yourself
To compute price improvement for a specific fill, you need the execution price, direction, share quantity, and the NBBO at the chosen reference time. For a buy fill at price P when the best ask was A, the per share improvement is A minus P if P is less than A, and zero otherwise. For a sell fill at price P when the best bid was B, the per share improvement is P minus B if P is greater than B, and zero otherwise. Multiply by the number of shares in that fill to get the dollar amount for that slice. If the order executed in multiple slices, repeat the calculation for each slice and sum the dollar amounts for a total figure.
Some data vendors provide historical NBBO feeds, which allow after the fact analysis. In fast markets, consider aligning timestamps carefully and recognizing that some brokers time stamp at order receipt while others record the execution event times only. Small differences in time alignment can change the measured improvement if the NBBO moved between those times.
Future Developments
Market structure evolves. Regulatory proposals sometimes address tick sizes, access to midpoint liquidity, and retail order handling. Any changes to tick size regimes or to the rules governing dark trading can alter where and how price improvement occurs. Likewise, evolving auction designs in options and equities can change the distribution of improvement across participants. These developments are monitored by exchanges, regulators, and market participants because they affect execution quality, displayed liquidity, and the interplay between lit and non displayed markets.
Key Takeaways
- Price improvement means receiving an execution at a better price than the prevailing NBBO for equities, or better than the displayed best quote for other products, at the relevant time.
- It arises from competition for order flow, internalization, midpoint matching in dark venues, and exchange programs that encourage stepping inside the spread.
- Measurement depends on the benchmark time and method, such as per share improvement versus the NBBO at order receipt or effective spread relative to the midpoint.
- The likelihood and size of improvement vary with order type, size, spread width, routing, and market conditions, and it is never guaranteed.
- Broker confirmations and regulatory reports provide data to evaluate improvement, but differences in order characteristics and timing can make direct comparisons imperfect.