Definition
The term price improvement refers to the process of obtaining a lower than offer price when buying a security or a higher than bid price when selling a security. Price improvement is one of the possible outcomes from a broker's duty of best execution.
Explanation
The duty of best execution is a requirement under the jurisdiction of the Securities and Exchange Commission (SEC). This requirement mandates a broker to seek out the most favorable terms of execution reasonably available to their clients, including securing the best possible price. Price improvement is measured against the National Best Bid and Offer (NBBO), which is a consolidated quote of bid and ask prices compiled from all visible quotes. Price improvement can occur in two ways:
When buying shares, the broker is able to execute the order at a price that is lower than the NBBO offer price, resulting in a savings to the investor.
When selling shares, the broker is able to execute the order at a price that is higher than the NBBO bid price, resulting in additional profits flowing to the investor.
Example
An investor would like to sell 500 shares of Company ABC's common stock. When the investor contacts their broker to place the order, the NBBO bid price was $100.00. After executing the order, the broker informs the investor they were able to sell the securities for $100.50 per share. The price improvement of $0.50 per share results in the investor realizing an additional profit of $0.50 x 500, or $250.00.
Related Terms
execution, ex-pit transaction, exercise, payment for order flow, duty of best execution, assigned
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