Price Improvement in Trading: What It Is, How It Works, and Why It Matters

Table of Contents#

1. What Is Price Improvement?
2. How Does Price Improvement Work?
   • The Role of the NBBO
   • Liquidity Providers: Market Makers, Exchanges, and Dark Pools
   • Order Types That Trigger Price Improvement
3. Key Takeaways About Price Improvement
4. Why Price Improvement Isn’t Guaranteed (And When to Expect It)
5. Real-World Examples of Price Improvement
6. 5 Strategies to Maximize Your Chances of Price Improvement
7. 4 Common Myths About Price Improvement (Debunked)
8. Conclusion: Price Improvement as a Tool—not a Guarantee
9. References

1. What Is Price Improvement?#

Price improvement is when your trade is filled at a better price than the National Best Bid and Offer (NBBO)—the public baseline for a security’s value—at the time you placed your order.

To simplify:

• Buying: Price improvement means paying a lower ask price than the NBBO (e.g., you expected to pay $190/share but pay$189.95).
• Selling: Price improvement means receiving a higher bid price than the NBBO (e.g., you expected to sell for $250/share but get$250.02).

Why Does Price Improvement Matter?#

Even small improvements compound. For example:

• Buying 1,000 shares with $0.05/share improvement saves **$50**.
• Selling 500 shares with $0.10/share improvement gains **$50**.

Over 100 trades, that’s $5,000 extra in your portfolio—no additional risk required.

2. How Does Price Improvement Work?#

Price improvement relies on liquidity providers (market makers, exchanges, and dark pools) that offer better prices than the NBBO. Let’s break down the mechanics.

a. The Role of the NBBO#

The National Best Bid and Offer (NBBO) is the foundation of price improvement. It’s the highest bid (what buyers will pay) and lowest ask (what sellers will accept) for a security across all U.S. exchanges. When you see a stock’s “current price” on a trading app, you’re looking at the NBBO.

The SEC mandates brokers display the NBBO to ensure transparency. Price improvement is better than the NBBO—it’s the “extra” your broker finds when a liquidity provider offers a better price than the public baseline.

b. Liquidity Providers: Market Makers, Exchanges, and Dark Pools#

Liquidity providers are the engines of price improvement. Here’s how each contributes:

i. Market Makers#

Market makers are firms (e.g., Citadel Securities, Virtu Financial) that buy and sell securities to provide liquidity. They profit from the “spread” (difference between bid and ask) but often offer better prices than the NBBO to attract orders. For example:

• If the NBBO ask for Apple (AAPL) is $190, a market maker might offer$189.95 to win your buy order.

ii. Exchanges#

Exchanges like the NYSE and Nasdaq use mechanisms to incentivize price improvement:

• Price Improvement Auctions: The NYSE’s “D-Limit” orders let traders fill at the best available price—even if it’s better than the NBBO.
• Supplemental Liquidity Providers (SLPs): Exchanges pay SLPs to offer additional liquidity at better prices than the NBBO.

iii. Dark Pools#

Dark pools are private trading venues for institutional investors (e.g., hedge funds) to trade large blocks of shares without moving the market. They don’t display orders publicly, so they can offer better prices than the NBBO. Brokers may route your order to a dark pool if it means price improvement.

c. Order Types That Trigger Price Improvement#

Not all orders are equal. Some are more likely to get price improvement than others:

Example: How a Marketable Limit Order Gets Improvement#

Suppose you place a marketable limit order to buy 200 shares of Tesla (TSLA). The NBBO is $250.00 (bid) /$250.05 (ask). You set a limit buy at $250.03 (better than the NBBO ask).

Your broker’s smart order routing (SOR) system scans:

• Exchange A: 100 shares at $250.05 (NBBO),
• Market Maker X: 200 shares at $250.03 (matches your limit),
• Exchange B: 50 shares at $250.06.

Your order fills at $250.03—**$0.02 per share improvement**, or $4 total.

3. Key Takeaways About Price Improvement#

Let’s distill the most critical points:

1. Price improvement = better than the NBBO: It’s not just a “good price”—it’s better than the public baseline.
2. Buying vs. selling: Lower ask for buyers, higher bid for sellers.
3. No guarantee: Depends on liquidity, order type, and market conditions.
4. Part of best execution: SEC Rule 606 requires brokers to seek the best possible execution—price improvement is one way they do that.

4. Why Price Improvement Isn’t Guaranteed (And When to Expect It)#

Brokers advertise price improvement—but they’ll never promise it. Here’s why:

a. 3 Reasons Price Improvement Fails#

1. Low Liquidity: Micro-cap stocks or low-volume ETFs have few buyers/sellers, so no one offers better prices than the NBBO.
2. Large Order Size: If you trade 10,000 shares and the NBBO only has 1,000 shares available, the rest fills at worse prices (slippage).
3. High Volatility: During earnings calls or market crashes, liquidity dries up. Brokers prioritize speed over price to fill your order.

b. When to Expect Price Improvement#

You’re more likely to get it if:

• You trade high-liquidity stocks (e.g., Apple, Amazon, Microsoft),
• You use limit or marketable limit orders,
• You trade during peak hours (9:30 AM–4:00 PM ET for U.S. stocks),
• Your broker has robust SOR (smart order routing).

5. Real-World Examples of Price Improvement#

Let’s make this tangible with three scenarios:

Example 1: Limit Order Buy (High Liquidity)#

• Stock: Microsoft (MSFT)
• NBBO: $330.00 (bid) /$330.10 (ask)
• Your Order: Limit buy for 500 shares at $330.05.
• Outcome: A market maker offers 500 shares at $330.03. You save **$0.07 per share** ($35 total).

Example 2: Market Order Sell (Moderate Liquidity)#

• Stock: NVIDIA (NVDA)
• NBBO: $480.00 (bid) /$480.08 (ask)
• Your Order: Market sell for 300 shares.
• Outcome: Your broker routes to a dark pool with a bid of $480.02. You gain **$0.02 per share** ($6 total).

Example 3: No Price Improvement (Low Liquidity)#

• Stock: XYZ Corp (micro-cap, low volume)
• NBBO: $0.50 (bid) /$0.55 (ask)
• Your Order: Market buy for 1,000 shares.
• Outcome: Only 200 shares are available at $0.55. The rest fills at$0.57–$0.62. No improvement—you get slippage.

6. 5 Strategies to Maximize Your Chances of Price Improvement#

Price improvement isn’t random—you can stack the odds in your favor:

1. Choose a Broker With Robust SOR#

Smart Order Routing (SOR) scans dozens of liquidity providers to find the best price. Look for brokers that:

• Publish price improvement statistics (e.g., Fidelity reports 96% of market orders get improvement),
• Offer access to dark pools and multiple exchanges.

Top brokers for SOR: Fidelity, Charles Schwab, Interactive Brokers.

2. Use Marketable Limit Orders#

Marketable limit orders are the “sweet spot”—they combine the speed of market orders with the price control of limit orders. For example:

• If the NBBO ask is $190, set a limit buy at$189.95 (better than the NBBO).

These orders fill immediately and target price improvement.

3. Avoid Low-Liquidity Times#

Trade during peak hours (9:30 AM–4:00 PM ET) when more buyers/sellers are active. Pre-market (4:00–9:30 AM ET) and after-hours (4:00–8:00 PM ET) trading have:

• Less liquidity,
• Wider spreads,
• Higher volatility.

All reduce your chances of improvement.

4. Monitor GTC Limit Orders#

Good Till Canceled (GTC) limit orders stay open until you cancel them. Check in periodically to adjust your price:

• If you set a limit buy at $189.95 for Apple, but the NBBO drops to$189.80, lower your limit to $189.75 to target more improvement.

Stale orders (e.g., a limit buy at $180 when the NBBO is$190) won’t fill.

5. Keep Limits Close to the NBBO#

To balance improvement and execution, set your limit close to the NBBO. For example:

• If the NBBO ask is $190, set a limit buy at$189.95 (not $185).

This ensures your order is “attractive” to liquidity providers while still targeting improvement.

7. 4 Common Myths About Price Improvement (Debunked)#

Let’s clear up confusion:

Myth 1: "All Brokers Offer Price Improvement"#

False. Brokers that route to only one exchange can’t find better prices. Check a broker’s Rule 606 report (required by the SEC) to see:

• How often they get improvement for customers,
• Which liquidity providers they use.

For example, Robinhood’s 2023 report shows 85% of market orders get improvement—lower than Fidelity’s 96%.

Myth 2: "Market Orders Always Get Price Improvement"#

False. Market orders prioritize speed over price. If no better prices exist beyond the NBBO, you fill at the NBBO. During volatility, market orders can even get slippage (worse prices).

Myth 3: "Price Improvement Is Free Money"#

False. You still pay:

• Commissions: If your broker charges per-trade fees,
• Spreads: The difference between bid and ask (even with improvement),
• Opportunity Cost: If your limit order doesn’t fill because you set it too low.

Myth 4: "Price Improvement = Best Execution"#

False. Best execution is a broad SEC requirement that includes price, speed, cost, and execution likelihood. Price improvement is one component—a broker can meet best execution without it (e.g., filling your order quickly during a crash).

8. Conclusion: Price Improvement as a Tool—not a Guarantee#

Price improvement is a valuable tool—but it’s not a magic bullet. It won’t make you rich overnight, but it will grow your portfolio over time if you use it strategically.

Here’s your final checklist:

1. Understand the NBBO: It’s the baseline for improvement.
2. Choose a broker with strong SOR: Look for published improvement stats.
3. Use marketable limit orders: Balance speed and price.
4. Avoid low-liquidity times: Trade during peak hours.
5. Monitor your orders: Adjust limits to stay competitive.

By mastering price improvement, you’ll trade smarter—and keep more of your hard-earned money.

9. References#

1. U.S. Securities and Exchange Commission (SEC). (2023). Best Execution: What Investors Need to Know. Link
2. NYSE. (2023). Price Improvement and Liquidity Provision. Link
3. FINRA. (2023). Understanding Order Execution. Link
4. Fidelity. (2023). 2023 Price Improvement Statistics. Link
5. SEC Rule 606. (2023). Disclosure of Order Routing Information. Link
6. Interactive Brokers. (2023). Smart Order Routing: How It Works. Link