After reading Chasing the Same Signals I started thinking about order execution, about which I know next to nothing. So I went to the CME site to educate myself. Alas, I’m still ignorant.
In a study dating from March 2009 the CME analyzed immediately executable orders--that is, orders that can be at least partially executed at the time they reach the central limit order book. One finding puzzled me: “order quantities between six and 49 contracts are being executed with lower market impact than orders of five or fewer contracts.” Market impact means “the difference between the middle of the market at the time of the order’s arrival and the order’s execution price, or the average execution price in the event of fills at different prices.”
The fact that the small trader often doesn’t get the best price is not a function of speed of execution. Orders to buy or sell between one and five contracts were filled within 30 milliseconds after their arrival at CME Globex 86% of the time and within 50 milliseconds 91% of the time. Orders for six to ten contracts were filled within 30 milliseconds 85% of the time and within 50 milliseconds 93% of the time. As order size increased so did average fill time.
Why do the smallest traders not get the best price? Perhaps they’re simply addicted to market orders and by definition always give up the spread. Perhaps CME’s matching algorithms tilt in favor of the larger trader, with FIFO being the default for small size. The upshot is that I don’t know the answer. I’m sure that many of my readers are more knowledgeable on this score than I am; if so, please share.