Internalization and Execution Quality: Ranking US Brokerage Firms

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23 November 2004


According to

Octavio Marenzi, Celent CEO and co-author of the report, "The SECs recent efforts to establish best price as the top priority for brokers handling investor stock orders is a step in the right direction and is desperately needed. Customer orders are frequently executed at prices worse than those available on the public markets. Indeed, in the second quarter of this year, just under one-fifth of all orders were executed at prices worse than the best prices visible on the public markets," adds Marenzi.

This 42-page report contains 23 figures and seven tables. A

is available online.
Boston, MA, USA November 23, 2004

In a new report, Celent examines the impact of internalization on execution quality and ranks leading US brokerage firms in terms of the quality of the equity trade executions they achieve for their customers.

The increasing tendency for brokerage firms to internalize trades has raised more than a few eyebrows. This practice, whereby a brokerage firm trades against its own clients orders and denies these orders the possibility of interacting with the public markets, appears to be laden with conflicts of interest. However, Celents analyses show that major US brokerage firms have appeared to managed these conflicts well. examines the extent to which orders are internalized and what impact internalization has on execution quality.

The report examines in detail the execution quality of 16 leading US brokerage firms: AG Edwards, Bear Stearns, Banc of America, Charles Schwab, Citigroup, CSFB, Deutsche Bank, Goldman Sachs, Lehman Brothers, Merrill Lynch, Morgan Stanley, NFS (Fidelity), Prudential, TD Waterhouse, UBS, and Wachovia.

Execution quality was measured using a number of criteria, including speed of order execution and prices achieved for clients. Data used in the report come from the second quarter of this year. The table below shows the top three firms overall as well as those ranked tops for prices and execution speed.

Rankings of Brokers' Execution Quality
Rank Prices Speed Overall
1 UBS Morgan Stanley Citigroup
2 Bear Stearns NFS (Fidelity) NFS (Fidelity)
3 Citigroup Charles Schwab Goldman Sachs
Source: Celent Communications

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