What is Price Improvement?
Price improvement is the often unexpected event of obtaining a better bid or ask price than the price quoted at the time the buy or sell order is made.
How Does Price Improvement Work?
For example, assume you own 1,000 shares of Company XYZ. On Monday, you decide to sell the shares. You call your broker and find out via the National Best Bid and offer (NBBO) that the ask on XYZ is $15. You place a sell order.
Five minutes later, your broker calls and tells you there's been a price improvement: the ask went to $15.50. You made an extra $500.
Why Does Price Improvement Matter?
The causes and sources of price improvement are nebulous, but often they have to do with simple changes in supply and demand in the market. Other times, the changes come from differences in price from one market to the next and depend on whether the brokerage firm is buying or selling shares on behalf of itself.
Regardless, at least one study finds that orders placed by individuals get approximately the same or better price improvement than orders placed by brokerage firms or institutions. Nevertheless, brokers often take the credit for price improvement (sometimes even advertising the percentage of their orders that are executed at prices better than the NBBO). Part of the job, after all, is to find the best price for the client.