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Are publicly available bid, ask, and last prices reliable when many trades take place outside stock exchanges?

Personal Finance & Money Asked on January 4, 2021

From my understanding, zero-commission trades are possible because stock brokers place orders for stocks on third-party platforms instead of placing orders on stock exchanges. The third-party platforms then reward the stock brokers for using their platform. As a result, trades are increasingly moving away from stock exchanges into these third-party platforms. Given that the publicly available bid, ask, and last trade quotes come from the stock exchange, doesn’t that mean that these publicly available stock exchange quotes are increasingly unreliable because they increasingly fail to capture the transactions that happen outside of the stock exchange?

For example, if I am looking at the "last trade" price of a stock, this "last trade" price is the price of the last trade on the stock exchange. It probably not the real "last trade" price because there might have been some trades that have happened on third-party platforms outside the stock exchange. So my concern is: to what extent should I trust the publicly available bid, ask, and last trade prices if they aren’t necessarily the real prices? Do the prices on third-party platforms have to accurately track the publicly available prices?

One Answer

There are a lot of descriptive issues in the formulation of your question.

Zero commissions trades are possible because brokerage firms choose not to charge them. Robinhood had a lot to do with this. For many brokerage firms, commissions provided only a small amount of their revenue (circa 5% for Schwab). The largest source of revenue for many brokers is interest income on account cash balances with additional income coming from other sources (margin interest, borrow fees, mutual fund and ETF service fees, sale of annuities, money management, etc.).

Stock brokers do NOT place orders for stocks on third-party platforms. These trades take place on ECNs (which are regulated) and these trades are reported.

These "third-party platform" rewards are called maker-taker fees.

Private trades between two parties outside of the realm of stock exchanges are not reported. These tend to be exotic trades.

therefore, I disagree with your premise that publicly available bid, ask, and last trade prices aren't necessarily the real prices.

Answered by Bob Baerker on January 4, 2021

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