The Math: What 'Price Improvement' Actually Means
Citadel Securities and other market makers tout 'price improvement' — claiming they execute retail orders at prices better than the quoted NBBO. What they do not explain: the improvement they provide is far less than what investors would receive on a competitive exchange. The gap between 'better than the worst possible price' and 'the best available price' is where Citadel's profit lives.
Aggregate Harm Estimates
Research estimates suggest that PFOF costs U.S. retail investors between $1 billion and $5 billion annually in foregone execution quality. With approximately 130 million retail brokerage accounts in the United States, this represents an average per-account annual cost of $8 to $38. Over a 30-year investing career, the compounded impact of this consistent execution degradation can represent tens of thousands of dollars per investor.
The Active Trader vs. Long-Term Investor
The impact of PFOF is not uniform. Active traders who place many orders see more execution quality degradation in absolute dollar terms. However, long-term investors who hold and rarely trade may be more harmed in relative terms — because every dollar of foregone execution quality is not available to compound over time.
What You Can Do
Choosing a broker that offers direct exchange routing (like Interactive Brokers' direct routing mode) eliminates most PFOF-related execution quality harm. Placing limit orders instead of market orders also reduces the ability of market makers to capture the bid-ask spread. And filing complaints with regulators — collectively — creates the accountability pressure that political action has failed to generate.