In recent years, the landscape of retail trading has evolved rapidly, driven by advancements in technology and increased accessibility to the markets. However, individual investors continue to face challenges, particularly related to execution quality and cost efficiency. Betterment has positioned itself as a leader in addressing these concerns by implementing a sophisticated trading execution framework that seeks to level the playing field for retail clients.
This article delves into the intricacies of Betterment’s approach to trade execution, emphasizing how the platform employs innovative strategies to enhance the trading experience for all users, irrespective of their investment size.
Table of Contents:
Understanding trade execution at Betterment
One of the cornerstones of Betterment’s execution strategy is the use of marketable limit orders. These orders are strategically placed near the current market price, allowing for immediate execution while maintaining price control. This method serves a dual purpose: it ensures rapid execution while also establishing a safeguard against significant price fluctuations. For investors, this means heightened protection against market volatility, reducing the likelihood of trades being executed at unfavorable prices.
The benefits of an omnibus trading structure
Another vital component of Betterment’s trading approach is its omnibus trading structure. Instead of processing each order independently, Betterment aggregates trades from clients, facilitating efficient batching and routing. This aggregation not only enhances access to deeper liquidity but also may contribute to lower overall execution costs. By pooling orders together, Betterment can achieve pricing advantages that are typically reserved for institutional investors.
Mitigating disadvantages for retail traders
Despite the advancements in retail trading, significant structural disadvantages persist, particularly for smaller orders and immediate execution strategies. Betterment’s managed execution framework addresses these challenges by systematically aggregating and scheduling trades throughout the day. This well-designed process minimizes execution risks and aligns with the realities of market structure.
By scheduling trades into structured windows, Betterment executes them multiple times throughout the day, balancing the need for timely transactions with the benefits of aggregation. Importantly, each order is routed externally to a clearing partner, ensuring transparency and accountability in the trading process.
Round lots versus odd lots: The execution quality disparity
The size of trades plays a crucial role in determining execution quality within equity markets. A round lot, typically consisting of 100 shares, is the benchmark recognized by exchanges and market makers. Such trades are prioritized in routing decisions and have better visibility in the National Best Bid and Offer (NBBO). Conversely, odd lots, which include any order of less than 100 shares, often suffer from reduced priority and transparency, leading to poorer pricing outcomes.
Research conducted by legal scholar Robert P. Bartlett III revealed alarming disparities in execution quality between round lots and odd lots. Odd-lot orders, according to his analysis of over 3 billion trades, received approximately 10% less price improvement than their round-lot counterparts. This issue is particularly pronounced in high-volume stocks, where even slight adjustments in trade size can lead to significant differences in pricing.
Enhancing execution through aggregation
To combat the penalties associated with odd lots, Betterment employs a strategic approach that focuses on aggregating client orders to reach round-lot thresholds whenever feasible. This aggregation is not merely a strategy; it is a necessary response to the documented disadvantages that odd-lot orders face. For instance, when multiple clients submit small trades, Betterment combines these into a single round-lot trade, significantly improving execution quality.
To illustrate this, consider a hypothetical scenario involving three clients—Alice, Bob, and Carol—who each place small trades. Individually, these odd-lot orders may receive unfavorable pricing due to their exclusion from the NBBO. However, when aggregated into a single trade of 100 shares, the collective order gains visibility and priority, enhancing the likelihood of achieving better pricing.
Achieving best execution standards
Betterment’s commitment to providing optimal execution is further reinforced by its ongoing evaluation processes. The platform adheres to a rigorous Best Execution Committee that monitors trading outcomes and assesses execution quality across various market centers. By analyzing key metrics such as basis point deviation from market prices, routing behavior, and peer comparisons, Betterment ensures that it meets its regulatory obligations while striving to achieve the best possible trading outcomes for its clients.
In summary, Betterment’s innovative trading execution framework not only addresses the inherent flaws in retail trading but also empowers individual investors by providing them with institutional-grade advantages. By leveraging strategies such as order aggregation, structured execution windows, and a focus on round lots, Betterment enhances the trading experience for its users, allowing them to navigate the complexities of the market with confidence.
