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I was reading Stocks Order Routing and Execution Quality on Robinhood's help pages, which says:

For example, in the third quarter of 2020, 97.53% of our customers' market orders for S&P 500 stock were executed at the NBBO or better [...]

This implies that 2.47% of market orders for S&P 500 stock on Robinhood were executed outside the National Best Bid and Offer (NBBO).

The situation is similar at another stock broker: Charles Schwab (Q3 2020 screenshot).

What causes some orders to execute outside the NBBO?

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  • Another reason why an order might not execute at NBBO is if you ask for non-standard settlement terms (e.g. T+1 instead of T+2) (see What is a “regular way” contract? and my answer... "In addition, certain price protection rules that apply to regular way settlement do not apply to T+1 trades". No idea if Robinhood offer this option, or whether any such trades are in the 2.47% figure.
    – TripeHound
    Nov 7, 2020 at 16:33

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The fact that you can send an order to an exchange that is not necessarily having the best offer. The NBBO is an artificial created in a data center. Orders do not execute there, they execute on exchanges. It takes time to send the changes in the order book from the exchange to the NBBO processing facility. So, even a good order routing algorithm may simply send the order to an exchange that it THINKS is best, but that is not best at the moment because of data still in transit and not distributed in the NBBO.

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  • If it's completely normal for some orders to execute outside the NBBO, then why do brokers bother to mention these stats? Why does Robinhood boast that 97.53% of S&P 500 stock market orders execute within the NBBO if such a statistic is almost meaningless according to your description of the situation?
    – Flux
    Nov 8, 2020 at 7:16
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    Because they sell you on their routing (i.e. their computer deciding on which exchange the order is executed). And saying "our algorithm makes sure that you get a better execution than manually deciding" sort of is a marketing factor for a certain number of people.
    – TomTom
    Nov 8, 2020 at 8:44
  • Tho I don't know how relevant it is today, Michael Lewis in "Flash Boys" (2014) explained that the Securities Information Processor uses old and slow technology to calculate NBBO. With faster processing and co-location, HFT has up to a 25 millisecond advantage to front run orders. The effect? With active issues, investors see stale quotes with NBBO. So while Robinhood may be filling orders within that, better prices are available. A Feb 2013 paper published by the Univ of California indicated that a price difference occurred as much as 55,000 times a day for AAPL.
    – Bob Baerker
    Dec 7, 2020 at 18:20
  • On average firms like Citadel Securities pay Robinhood 17 cents per 100 shares. This is 19% above average for other internet brokers such as Charles Schwab or E-trade according to Bloomberg intelligence. In the first quarter of 2020 this even went up to 24cents per 100 shares presenting a 48% premium over the average order flow. This sort of premium is quiet obviously to the detriment of retail investors.
    – Bob Baerker
    Dec 7, 2020 at 18:21

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