Individuals May Soon Get a Say in Order Handling

Wonder whether you’re getting the best executions on your stock trades? Join the club.

Even with today’s technology, individual investors have little say in how their stock orders are handled, and virtually no way to know if they’ve gotten the best deal.

But that may slowly change.

Some online brokerages are beginning to offer systems that would let customers send orders through “electronic communication networks” where they may receive more favorable prices.

Down the road, “firms will probably allow [a mechanism] on their Web sites for customers to choose where they want their orders routed,” said Gregg Sharenow, chief operating officer at National Discount Brokers Group.

Online brokerages E-Trade Group and Waterhouse Investor Services have recently purchased stakes in ECNs, which are alternative trading networks that compete with Nasdaq market makers. E-Trade plans to give customers the option this summer to send orders through its ECN, known as Archipelago.

Only a small number of customers will be interested in using Archipelago, said Lisa Nash, an E-Trade spokeswoman, but “the ones that are will be extremely interested.”

By sending sizable order volume to ECNs--where orders from buyers and sellers are matched--online firms would sacrifice the order-flow payments they now receive from market makers.

But that may be necessary to keep customers happy, said James Marks, an analyst at Deutsche Bank Securities. “It’s like giving up heroin. They’ve got to give up the order-flow payments,” Marks said.

The impetus for the changes at online firms is coming from rivals that already promise customers better control of their orders. For example, CyBerCorp, an Austin, Texas-based online brokerage and software firm, recently unveiled a computerized system that it says can automatically route orders to the source promising the best execution.

To be sure, the availability of alternative trading systems and ability to choose where orders are sent won’t be a panacea for investors, experts say.

For example, a “market” order sent to a Nasdaq market maker under the current system is certain to be filled, even if at a sometimes unfavorable price. An order routed to an ECN, by contrast, may never get filled if too few investors are in that market at that point. The customer may be forced to place a new order, potentially resulting in an inferior execution.

“Is the execution any better at one or the other [dealer or ECN]?” said Dan Burke, senior analyst at consulting firm Gomez Advisors. “That has yet to be proven.”

Also, the advanced systems aren’t cheap. Access to the CyBerXchange program, for example, costs $49 a month on top of commissions ranging up to $19.95 per trade. The cheapest system at online broker A.B. Watley that lets customers route their own orders costs $75 a month.

Execution is most important for individuals who trade actively. For buy-and-hold investors and those who trade infrequently, seeking out alternative execution options may not be worth the effort, experts say.

Meanwhile, all individual investors can help themselves by using “limit” orders to trade stocks rather than the far more common “market” orders.

Limit orders specify a price at which an investor will buy or sell a stock, and if the order is filled, the customer is guaranteed that price or better. Market orders, by contrast, are open-ended and thus can vary tremendously according to the stock price at the moment the order is filled.