ETF Trade Execution Quality during the Flash Crash Month

Subtitle: Some market orders received better price execution than limit orders.

Recently, all market centers disclosed Rule 605 reports for May 2010. This data provides insights into the quality of trade execution across all market centers by ticker, order size, and order type. The following analysis focuses on a favorite focus point of the Flash Crash debate: ETFs. By utilizing the Rule 605 disclosures for May 2010, a volatile month for equities trading, we can observe where ETF trades received better price execution.

There are no clear strong or weak points apparent in the numerous graphs below. Each reader may have an interest in specific ETFs or market centers. Unfortunately, there are too many permutations of ETFs and market centers to be covered within this post. The following graphs sample a few ETF complexes and market centers with the highest trading volumes during May 2010.

More importantly, Rule 605 disclosures summarize trades for the entire month, not itemized by day. Hence, the following graphs do not solely represent trading activity on May 6, 2010, when many ETF orders were cancelled as a result of extreme price volatility resulting from brief market illiquidity. (Judging from the wide range of price improvement statistics, these cancelled trades appear to be included in the data, but one cannot assume the all market centers included erroneous trades in their disclosures.) For some ETFs and specific market centers, the price volatility on May 6 may have been large enough to significantly impact the summary statistics for the entire month. Nevertheless, a comparison of the same statistics across ETFs and market centers should demonstrate how trade execution performed on a relative basis.

In previous posts (iShares/NFS and Schwab/UBS) concerning ETF trade execution quality, Fundometry studied how much trades were executed inside the NBBO, at the market, and outside the NBBO for specific market centers. One post defined a useful summary metric called Weighted Average Price Impact ("WAPI"). In the Rule 605 disclosures, price impact (in dollars per share) is disclosed separately for trades where price improved and degraded (or, as some might say, disimproved) relative to the subsequent NBBO. The overall price impact of trades can be summarized by averaging the price impact for individual categories of trades, based on improvement or degradation relative to the NBBO and weighted according to respective volumes in each category. A positive WAPI indicates that overall more shares traded with price improvement (i.e. price at execution was better than the NBBO when the order was submitted) than with price degradation, and the opposite would be implied by a negative WAPI.

In addition to WAPI, the following graphs plot volume of executed orders, including orders routed to other market centers. Ideally, this data on trade execution would be itemized separately for internal orders and orders routed to other market centers (in cases where the best price existed at another venue). Unfortunately, the data summarizes trade execution quality across all orders executed regardless of venue (internal or external). In order to highlight the impact of orders executed internally to any given market center, only data is included if the volume of internal orders contituted at least 80% of total executed volume. (The final graphs in this post follow a stricter threshold of 5%.)

Finally, both WAPI and volume are broken down by market orders and marketable limit orders - the only two types of orders for which price improvement/degradation statistics are available.

Based on the Rule 605 disclosures sampled in this analysis, three ETF complexes had the largest trading volumes of market and marketable limit orders during May: SPDR, iShares, and ProShares. Initially, ETFs will be summarized at the complex-level (volume-weighted summary of all tickers within an ETF family) across different market centers (exchanges, ECNs, ATS, etc). Subsequently, selected individual ETFs will be analyzed in greater detail, by order size and order type. (Given the number of graphs involved, including other ETF complexes or selecting more individual ETFs would cause this post to become rather voluminous.)

Complex-Level Perspective

In these complex-level graphs, market centers displayed along the horizontal axis are sorted according to overall WAPI. Market centers which executed orders with overall price degradation (outside the NBBO recorded at the time the order was submitted) are displayed closer to the left side. Despite this sorting order, some market centers achieved notably better or worse trade execution quality depending on the order type (market vs marketable limit).

The following graph summarizes trade execution quality for SPDR ETFs during May 2010.

For the SPDR family of ETFs, a few low-volume market centers exhibited the least favorable trade execution quality. Among market centers with notable volume, National Financial Services (NFS), BATS, and Knight Capital Markets performed less favorably relative to their peers, in terms of WAPI. Depending on the market center, market orders received better price execution than marketable limit orders (as seen when red diamonds are higher than blue diamonds). While there is no clear indication of where market orders should have fared better, marketable limit orders (a buy order above the best offer or a sell order below the best bid) did not always result in better price execution than market orders.

The following graph, which summarizes trade execution quality for iShares ETFs during May 2010, shows that orders executed at UBS, Knight, and Chicago Stock Exchange (CHX) Matching System received less favorable price execution relative to their peers. CHX and NFS executed market orders (red diamonds) at better prices than marketable limit orders (blue diamonds), but the opposite was the case at UBS and Knight. Direct Edge X exhibited the most negative WAPI among market orders.

The following graph for ProShares ETFs shows that Knight Equity Markets executed marketable limit orders with a reasonable WAPI but achieved relatively poor execution quality with market orders. Conversely, Knight Capital Markets achieved reasonable WAPI for both types of orders. Among peers, Oppenheimer exhibited the best WAPI for marketable limit orders but performed poorly with market orders. Again, one can observe how order type matters depending on the venue.

Focus: SPDR ETFs

The graphs above summarize trade execution quality for different market centers across all ETFs within a single family. Conversely, the following graph summarizes trade execution for different ETFs in the SPDR complex across all market centers.

Two ETFs with the least favorable WAPI, XSD and XBI, exhibited worse price execution for market orders than for marketable limit orders. Otherwise, market orders received more favorable execution, based on price, than marketable limit orders for most of the other tickers (even though volume for market orders was substantially lower than for marketable limit orders). In comparison to other tickers, MDY and GWX exhibited less favorable price execution for marketable limit orders. These four ETFs merit more detailed analysis.

The following graph drills down into trade execution quality by order type and order size for XSD.

Interestingly, two specific categories of market orders account for the unfavorable WAPI: (1) order quantity 2000-4999 (order size code "C") executed at UBS Securities and (2) order quantity under 500 shares (order size code "A") executed at Knight Capital Markets. Furthermore, the most favorable WAPI for market orders in this graph occurred at Knight Capital Markets for order quantity over 5000 shares (order size code "D"). Given that the fragmentation of market structure generally favors smaller orders for achieving better execution quality, the results at Knight are unexpected.

Does the same graph for XBI result in similar observations?

Yes and no. As was the case for large-quantity market orders for XSD executed at Knight, the largest-quantity market orders (2000-4999 shares) for XBI executed at NYSE Arca achieved the most favorable WAPI, certainly better than smaller-quantity market orders. At Knight, larger market orders (2000-4999 shares) received substantially less favorable WAPI than market orders with the largest-quantity (over 5000 shares). However, at Automated Trading Desk, the largest-quantity market orders (over 5000 shares) received substantially unfavorable WAPI than all other comparable orders on this graph. (Note that the total volume on some of these categories of market orders is very small.)

In the two graphs above, the WAPI for marketable limit orders was very consistent relative to market orders. Two SPDR ETFs which exhibited unfavorable execution, based on WAPI, for marketable limit orders are MDY and GWX. The following graph drills down into trade execution quality for MDY.

Marketable limit orders for MDY executed at Barclays Capital and Direct Edge X received increasingly less favorable WAPI as the order size increased. This pattern follows the broad expectation that smaller orders receive better price execution. To a lesser extent, the same pattern is evident at BATS Exchange and NASDAQ. However, market orders received more favorable WAPI than marketable limit orders, based on comparable order sizes.

The same graph for GWX yields less conclusive observations.

At NYSE Arca, Knight Capital Markets, and UBS Securities, marketable limit orders received better WAPI when the order size was smaller, but the opposite trend occurred at LavaFlow ECN (where volume was also lower). At UBS Securities, market orders received better WAPI when their order size was smaller, but at Knight there was no conclusive pattern to how well a market order would be executed according to its size.

Focus: iShares ETFs

Switching from the SPDR to iShares complex, the following graph summarizes trade execution for different ETFs in the iShares complex across all market centers.

Two ETFs stand out in terms of unfavorable WAPI for market orders: IWV and IWR. In addition, for marketable limit orders, EFG exhibited a less favorable WAPI than its peers. The following three graphs analyze what happened with each of these iShares ETFs.

For IWV, one could easily miss any anomalies in the trade execution quality. The red diamond at the lower left region represents substantially negative WAPI for large-quantity market orders executed at Knight Capital Markets. Smaller market orders at Knight received better execution. Other market centers exhibited reasonable results.

The results for IWR are surprisingly consistent with IWV. Large-quantity market orders executed at Knight received substantially negative WAPI, as indicated by the red diamond in the lower left region. The remaining data points are easier to view when this one negative outlier is excluded from the graph.

Across all five market centers, marketable limit orders received less favorable WAPI as the order size increased, with a few exceptions. At Knight, only the smallest-quantity market and marketable limit orders achieved positive WAPI. At NYSE Arca, market orders once again exhibited more favorable WAPI than marketable limit orders of comparable order size. While Automated Trading Desk executed market orders with more favorable WAPI as the order size decreased, the same pattern could not be observed for marketable limit orders.

Before switching focus to EFG, one may wonder whether orders for other iShares ETFs exhibited substantially negative WAPI at Knight. The following graph indicates that IWV and IWR were unique outliers, but some other ETFs also exhibited less favorable WAPI for market orders: IVW, IWP, IJT, IJH, and IJR.

For EFG, the least favorable WAPI for marketable limit orders occurred at E*Trade Capital Markets, although the magnitude is insignificant when compared to results for IWV and IWR.

At E*Trade, the largest-quantity marketable limit orders for EFG exhibited substantially unfavorable WAPI versus other market centers. Knight Capital Markets executed marketable limit orders with improving WAPI as the order size increased (again, counter to expectations based on general market structure). Even NYSE Arca and Pershing followed a similar pattern with respect to market orders (i.e. more favorable WAPI as order size increased), except when Pershing executed the largest-quantity market orders.

Focus: ProShares ETFs

The following graph summarizes trade execution for different ETFs in the ProShares complex across all market centers.

As shown in the next two graphs, both SQQQ and UPRO exhibited similar patterns to earlier examples for selected SPDR and iShares ETFs. In the case of SQQQ, market orders of quantity 2000-4999 executed at Knight Capital Markets received the least favorable WAPI, although not of significant magnitude in comparison to IWV and IWR.

For UPRO, the largest market orders executed at Knight received the most negative WAPI.

However, for ROM, market orders of the largest-quantity (5000 or more shares) exhibited the least favorable WAPI at Citadel Securities, although Knight and Automated Trading Desk also executed market orders with relatively less favorable WAPI.

Conclusions

Depending on the market center and specific ticker, trade execution quality, as measured by Weighted Average Price Improvement, varies wildly. As seen in the graphs above, robust generalizations are difficult to draw.

1. Marketable limit orders do not always receive better price improvement than market orders. Marketable limit orders are limit orders which should be executed immediately, as with market orders, because either the order bid is higher than the best offer or the order offer is lower than the best bid. Depending on the market center, market orders can receive better price improvement versus marketable limit orders of comparable order size. In other words, executing a market order may result in price improvement despite the fact that many erroneous trades involved stop loss market orders.

2. Depending on the specific ETF, market center does matter. Among the small sample of graphs above, some market centers repeatedly achieved less favorable price improvement than their peers. The Rule 605 disclosures cover only orders for which a market center was not specified by the investor. As a result, the data should reflect efforts to route orders to the market center which has the best NBBO at a given time. However, identifying the reasons why an order executes at a specific venue requires more data than available through the Rule 605 disclosures.

3. Major market centers with a large share of volume (usually synonymous with deep liquidity) do not necessarily achieve better price improvement. Regardless of trading volume, some market centers appear to execute market orders with better price improvement than for marketable limit orders. The same complex-level graphs shown above are available with market centers sorted from left to right in order of trading volume: SPDR, iShares, ProShares.

4. Typically, order size does matter. Depending on the market center and individual ETF, smaller orders might achieve better price improvement than larger orders, but many instances of the opposite exist. At least one should not assume that smaller orders always achieve better price improvement, especially with market orders. Since some trade execution statistics are based on small order volumes, one should study more periods of history in order to draw statistically robust conclusions.

For those seeking a more league-tablesque summary, the following graphs may be more satisfying. These graphs list the most and least favorable price improvement performances for combinations of individual ETFs and market centers. Market orders and marketable limit orders are shown separately, as their overall magnitudes of WAPI are different.

One of the market centers should be familiar by now (if not, this WSJ article might help). For those seeking a comparison, the same graphs for April are available for market orders and marketable limit orders.

Clearly, May was an exceptional month as highlighted by the price impact of ETF trades. In such challenging and volatile markets, is the quest for price improvement worthwhile, or would a market center be better off routing an order elsewhere? For investors, the dilemma is even more complicated: which ETF, order type, and order quantity would work best? There can be no assurance that if Flash Crash II ever occurs, the quality of price improvement will follow similar patterns.

Fidelity Customers and iShares ETF's: the Impact of Commission-Free Trades

On February 2, 2010, Fidelity announced that their clients would be able to buy and sell a select group of 25 iShares ETF's commission-free, in addition to Fidelity's NASDAQ Composite Index Tracking Stock. The move follows a decision by Schwab offer commission-free trading on a select group of proprietary ETF's. Fidelity offers a larger number of commission-free ETF's than Schwab, plus the strong reputation of iShares.

In an earlier analysis of Schwab's commission-free arrangement, we studied the quality of trade execution at UBS, a major venue (technically, market center) for executing orders on Schwab ETF's. Even though UBS executes a large volume of orders for Schwab ETF's, other "ETF complexes", such as State Street, Vanguard, and PowerShares, exhibited better trade execution than the Schwab complex. This analysis of the iShares trade execution complex will follow a similar theme.

Morningstar appropriately asks in their commentary who really benefits more from the Fidelity-iShares arrangement: Fidelity or iShares? Their assessment concludes both parties win. Fundometry expands the audience to include investors who enter those commission-free orders. By looking at iShares ETF's which trade commission-free and those which do not (most of the iShares ETF's), we can compare execution quality with respect to the commission as well as time (before and after February 2010).

Fidelity is not a leading venue for trading iShares, or some of the other major ETF complexes. The following two graphs show how much volume was executed at NFS (Fidelity) versus other market centers. ETF complexes are selected from the top five traded ETF's, in terms of share volume over six months, at each market center. (Two graphs are better than one because the market centers range widely in terms of volume, hence the horizontal scales are different to accommodate the higher and lower volumes.) Someone entering an order through Fidelity to buy or sell an ETF (not only those from iShares) may hope the order is routed to another market center which handles a larger order flow, hence sourcing more liquidity and hopefully achieving better price execution. For those iShares which trade commission-free at Fidelity, the graphs show the volume for those respective tickers in a lighter shade, even though the actual trades may have incurred a commission if entered from brokerages other than Fidelity.

Interestingly, if an ETF order is entered from Fidelilty and gets routed to NFS, there appears to be a near certainty strong probability that the order will be executed at NFS. The following two graphs compare how much of the order flow was executed at the specified market center as opposed to being routed to another market center where a better price existed. NFS is not the only brokerage with a tendency to keep orders internal; Knight, Citadel, and Barclays also show no red bars.

Although NFS handles a relatively small volume of orders for iShares ETF's, order flow does not appear to route to other market centers which may offer deeper liquidity. Why? Perhaps because NFS does not need to route an order to another venue if it can execute at a price better than or equal to the National Best Bid and Offer (NBBO). Unfortunately, the following graphs, utilizing the same source data as the above graphs, do not readily support that explanation.

The above two graphs show the breakdown of share volumes according to execution quality during each month (October 2009 through March 2010): improvement (better than the quote), at the quote, and outside the quote (degradation). NFS (Fidelity), Knight, Citadel, and Barclays tend to execute orders themselves rather than route to other market centers (as stated earlier). Over the sampled period, Knight and Citadel exhibited noticeable price improvement for the tickers which Fidelity customers can trade commission-free. Barclays achieved price improvement to a lesser extent but executed a decent amount at the quote. In significant contrast, NFS showed a worsening trend in terms of execution quality. NFS substantially exceeded its competitors in executing outside the quote, a trend which dramatically increased in January and persisted through March. Why would Fidelity offer to not charge commissions for iShares ETF's for which it could not achieve better execution (even when charging commissions)?

Perhaps some more insight can be derived from looking at the other iShares ETF's which Fidelity still charges its customers to trade.

Once again, Knight and Citadel demonstrated a degree of price improvement, outpacing Barclays and NFS. While Fidelity charged a commission for trading the ETF's sampled in the above two graphs, the extent of price degradation was even higher than those ETF's which trade commission-free. In March, trades executed at NFS exhibited a higher rate of price improvement than in preceding months, and trades executed outside the quote subsided yet remained at a high level. Given that trading activity at these market centers are compared for the same group of ETF's and over the same period, the above graphs do not explain how Fidelity's customers (trading iShares ETF's commission-free or not) are winning with respect to execution quality.

Corresponding comparisons for some other major ETF complexes paint a similar picture: Direxion, PowerShares, and ProShares.

While many trades executed outside the quote, to what extent was price impacted? In other words, how far outside the quote did NFS fill orders? Since price impact (in dollars per share) is disclosed separately for trades where price improved and degraded, a weighted average, based on their respective share volumes, can be computed. The following graphs display the share volume in each market center for iShares ETF's which trade commission-free at Fidelity and the corresponding weight-average price impact ("WAPI").

In terms of WAPI, NFS once again stands out from its peers. NFS consistently achieved adverse (negative) overall price impact throughout the six-month period. As indicated above, the trend worsened after December. A peer with comparable volume, Barclays, also exhibited adverse WAPI but to a lesser extent than NFS and without significant trend. Among the largest market centers, BATS and Direct Edge exhibited adverse WAPI but to a much lesser extent than NFS. (Differences in the volume of specific ETF's at each market center explain some of these variations, but in general NFS did exhibit consistently more adverse WAPI versus BATS and Direct Edge among specific ETF's. If interested in more details, please submit a comment below requesting more information.)

The following graphs display the share volume in each market center for iShares ETF's which Fidelity charges its customers to trade and the corresponding weight-average price impact ("WAPI").

The performance across market centers is consistent with the iShares ETF's which trade commission-free at Fidelity. BATS, Direct Edge, Barclays, Knight Equity Markets, and NFS exhibit adverse WAPI. However, BATS, Direct Edge, Barclays, and Knight followed an improving trend over time. In terms of WAPI, only NFS achieved more adverse WAPI from late 2009 to early 2010.

Similar graphs for other ETF complexes similarly show NFS achieving increasingly adverse price impact over time, in contract to most peers. If the above graphs are not sufficient, click on the following ETF complexes to open a few more: Direxion, PowerShares, and ProShares.

In conclusion, while the arrangement between Fidelity and iShares does make tremendous sense from a marketing perspective, the quality of trade execution leaves much more to be desired. For financial advisors or long-term investors who prefer using ETF's, the price impact may not be meaningful enough to diminish the cost savings from zero commissions, as long as trades are not too frequent. Conversely, for day traders, the economics of avoiding a commission may not offset adverse price impact while executing an order at NFS (assuming that a Fidelity customer does not have the option of specifying at which market center to execute). As with any analysis of vast amounts of data, the results have varying relevance depending on individual investor circumstances. Nevertheless, one cannot help but wonder if NFS will improve its trade execution quality for ETF's - regardless of whether a commission is charged or not.

A few important details concerning the data utilized for this analysis:

1. The above graphs compare data gathered from Rule 605 disclosures from approximately a dozen market centers (trading venues). Those venues are selected based on the Rule 606 disclosure from National Financial Services ("NFS", an affiliated broker-dealer of Fidelity) which lists to which market centers Fidelity routed equity orders during the first quarter of 2010.

2. The Rule 605 disclosures for each market center (except for BIDS Trading) are used to analyze trade execution quality over the six month period from October 1, 2009 through March 31, 2010. Data at the individual ETF (ticker) level is aggregated according to the sponsoring firm (e.g. iShares, State Street, PowerShares).

3. The above graphs reflect only market and marketable limit orders. While other types of limit orders are frequently used, Rule 605 disclosures report execution quality for only market and marketable limit orders. To see a table summarizing activity by order type, click here.

4. Aggregated figures may not be ideally comparable across market centers and ETF complexes (sponsoring firms). Each market center has a different share of the trading volume for each ETF which impacts the comparison of execution quality across different market centers and during different months. Furthermore, not every market center has necessarily executed trades in every ticker within an ETF complex.

5. Weighted average price improvement may reflect some biases due to the differing prices of ETF's. Higher priced ETF's may have orders filled with greater deviations from the quote than a lower priced ETF. Conversely, lower priced ETF's may trade in larger share volumes than higher priced ETF's. The weighted average considers both the impact on price, in dollars, weighted by the corresponding share volume. Orders filled at the quote are included in the weighted average with an assumed price impact of zero.

In Search of Price Improvement for Schwab ETF's

When Charles Schwab sold its capital markets affiliate to UBS in October 2004, the industry took notice of the impact: UBS gained significant market share in NASDAQ equities trading as well as the sizable equities order flow from Schwab's customers. Schwab does not receive rebates or other payments from UBS. Nevertheless, part of the consideration Schwab received for the sale was a commitment to route orders through UBS for eight years, starting in 2004.

Normally, Schwab charges a commission for trading equities and options. However, on November 3, 2009, Schwab announced the launch of their proprietary ETF's as well as their unprecedented $0 online commission rate for Schwab clients.

Does this no-commission/no-rebate arrangement have any impact on order flow or order execution? Comprehensive details are not easy to collect, but the following analysis is an attempt at providing some insights from data which is available.

This analysis utilizes Rule 605 disclosures for the following exchanges and ECN's ("market centers"): UBS, NASDAQ, NYSE Arca, BATS, DirectEdge, Instinet, Knight Capital, and Citadel. The sample period covers November 2009 through January 2010. Other market centers executed or routed orders for Schwab ETF's, but this sample accounts for 72% of the trading volume over the sampling period.

Below, we look at various statistics among some of these market centers with a specific focus on UBS.

(Note on the following graphs: Individual ETF's are aggregated according to their sponsoring firm into "ETF complexes". Although the selected ETF complexes have trading volumes larger and smaller than that of the Schwab complex, Schwab's ETF volume should fall roughly in the center of the distribution. Shown next to each ETF complex is the aggregate volume, over the sample period, expressed in millions of shares. The graphs do compare ETF complexes with varying amounts of liquidity, but one can isolate those with similar trading volumes by noting the figures in parenthesis.)

What happens when a broker (assumed to be Schwab) routes a Schwab ETF order through UBS?

We observe how many shares are traded at market centers other than UBS, out of all shares routed and traded through UBS. Few other ETF complexes get such exclusive treatment by UBS, certainly none as large as the Schwab complex. UBS traded fewer shares of First Trust, Rydex, and WisdomTree ETF's (10.4, 9.3, and 11.9 million shares respectively) than Schwab (17.3 million shares) yet routed more of their orders to other market centers.

What happens when a Schwab ETF order is routed through other major market centers?

If a market center cannot fill an order at the best price (national best bid and offer, or "NBBO"), then that center should route the order to another venue where a better price is available. On that basis, other market centers don't seem as capable as UBS in achieving best trade execution for Schwab ETF's. Perhaps this makes sense if the investors trading Schwab ETF's are mostly Schwab clients. As seen above, although NYSE Arca handles orders representing 2.1 million shares of Schwab ETF's, it routes almost 10% of those orders to other market centers where better prices are presumed to have been available.

How well did UBS fill those orders which it chose to handle internally (i.e. not route to other market centers)? Given the data available, we can look at how many shares were executed inside the quote (known as "price improvement"), at the quote, and outside the quote. The following graphs display the percentage of shares which fall into one of these "three tiers" of execution quality. Most orders are either market orders or marketable limit orders. Therefore, we report the two types separately since there may be inherent differences between the manner in which market orders and marketable limit orders are executed. One would especially hope for price improvement on market orders, but no worse than filling at the quote.

Given that UBS executed almost all Schwab ETF's orders internally, it is interesting to see how UBS fills market orders. Among complexes of comparable trading volume, Schwab ranked quite low on price improvement. UBS achieved the best price improvement for iShares ETF's, at about 75% of the total 228 million shares traded with market orders. First Trust ETF's, with a smaller volume of 9.1 million shares traded with market orders, still saw price improvement for 65% of that order flow. UBS achieved price improvement for Schwab ETF's for about half of the 14.7 million shares traded with market orders. The results for at the quote and outside the quote fills are respectable, but nothing special either.

For marketable limit orders, UBS handled Schwab ETF volume of 2.6 million shares. Price improvement ranked somewhat better across the same sample of ETF complexes, but not by much. Approximately 3% of shares traded with marketable limit orders saw price improvement, while almost all others were executed at the quote. UBS achieved the best rate of price improvement for Victoria Bay ETF's with a higher volume (24.6 million shares). ETF's from First Trust and Rydex, with 1.3 and 1.6 shares traded respectively, saw better rates of price improvement even though their volumes are smaller than that of Schwab ETF's.

The same statistics are available at other market centers. Results can be skewed depending on the order volume handled by each market center. Hence, the initial table, showing volume of executed orders by market center, may be a helpful reference.

In comparison to other ETF complexes, NYSE Arca executed market orders and marketable limit orders for Schwab ETF's with modest price improvement, which falls near the lower end of the range. Note that the volume of market orders is very small, only 0.1 million shares of Schwab ETF's executed and no more than a million shares for any other ETF complex. The volumes for marketable limit orders was higher, with 2.0 million shares of Schwab ETF's executed, and Schwab ranked roughly in the middle of the distribution.

Similarly, Schwab ETF's traded on NASDAQ with very little price improvement, but nevertheless ranked near the middle of the range among other ETF complexes with comparable volumes. NASDAQ did not disclose any statistics for market orders.

For orders executed at BATS, Schwab ETF's received the most-frequent price improvement for marketable limit orders in comparison to peers, while price improvement seldom occurred for market orders. Out of 0.8 million shares traded in Schwab ETF's with marketable limit orders, BATS achieved price improvement for approximately 12% of the order flow. While this percentage is much lower than the rate of price improvement achieved by UBS, Schwab ETF's ranked better than other comparable ETF complexes for marketable limit orders executed at BATS.

While digesting these graphs, consider these additional factors.

1. The trading activity spans only three months, although all market centers and ETF complexes are compared over the same period. Schwab launched its proprietary ETF's in November 2009, hence relevant activity does not exist for prior months.

2. Only online orders entered through Schwab are commission free. Orders entered through other channels (e.g. phone) are not advertised as commission free, even though those orders would likely be executed through UBS. The available data does not provide any information on the order entry method. Hence, this analysis assumes that the majority of Schwab ETF's orders routed through UBS were entered online.

3. Other attributes may differ between orders routed through UBS and orders routed through other market centers. No details are available on actual limit prices on limit orders, and the specific execution times and applicable NBBO's are not provided. However, further analysis can be performed on the amount of price improvement at the ticker level.

Execution quality is challenging to track and measure. The summarized data used in this analysis attempts to compare execution quality among major market centers at the level of ETF complexes. While not digging into finer levels of comparison (ticker level or specific month), this analysis demonstrates that Schwab ETF orders routed through UBS almost exclusively get executed at UBS and generally with less frequent price improvement than orders executed at UBS for other ETF complexes. Nevertheless, the other market centers in the sampled data exhibited even less price improvement.

UBS probably has an advantage versus other market centers due to its sizable portion of order flow for Schwab ETF's, even though other ETF complexes with smaller volumes (such as Claymore, WisdomTree, and Rydex) achieved more frequent price improvement at UBS. On the other hand, UBS achieved price improvement for other ETF complexes (such as iShares, Vanguard, PowerShares) to a greater extent than for Schwab ETF's even though a larger portion of orders were routed to other market centers.

Would paying a commission in order to trade an iShares ETF have resulted in more cost-effective execution than paying no commission to trade a Schwab ETF? The answer may depend primarily on order size and the frequency of trading. This analysis is not exhaustive and cannot be conclusive, but the sampled data demonstrates that paying no commission when trading an ETF might not always result in the lowest overall execution cost.