Beyond best price: Uncovering trade-throughs in fragmented markets

This study investigates the prevalence and factors associated with trade-throughs, defined as executions at prices inferior to the National Best Bid and Offer (NBBO), in U.S. equity markets. Using Rule 605 reports from exchanges and wholesalers for over 1500 firms (2019–2022), we document that trade-throughs are neither rare nor economically trivial. Non–S&P 500 firms exhibit higher average trade-through rates (4.0%) than S&P 500 firms (2.4%). Wholesalers drive much of this activity, reporting trade-through rates that are up to 21 percentage points higher than those of exchanges. These deviations impose material transaction costs, at times exceeding 46% of quoted spreads and 75% of effective spreads. Further analysis reveals that fragmentation, volatility, and latency strongly influence trade-through behavior, while firm size and listing venue shape cross-sectional differences. Trade-through behavior is also serially correlated, indicating structural persistence. For market participants, these findings underscore the importance of routing strategies and execution speed management, as rapid execution can increase implicit costs. Furthermore, these findings challenge the assumption that trade-throughs are negligible frictions and underscore their implications for best execution standards, order-routing transparency, and market efficiency.