Price Improvement
Price improvement happens when an order is executed at a better price than the best available pubic market price, known as the National Best Bid and Offer (NBBO).
NBBO is a consolidated view of the highest bid and lowest offer price from all exchanges and public trading venues.
If a token has a bid of $10.00 and offer of $10.50 on an exchange, a market maker might quote $10.20 to buy and $10.30 to sell if it knows it's filling retail order flow. A retail trader would have paid $10.00 to sell but now she can sell for $10.20 to the market maker – a price improvement of $0.20. On the other hand, a trader would have paid $10.50 to buy on the exchange but now she can buy for $10.30.
The market maker makes $0.10 in spread and can pay the brokerage firm $0.04 (this is known as payment for order flow) while still netting $0.06. Market makers don't have to improve prices on all orders, but they are incentivized to do so because they compete with each other for order flow. For example, in traditional equities market, brokerage firms rank market makers based on the price improvements they offered over periods of time.
At a high level, a transparent and competitive PFOF market is important for efficient prices (i.e. tight spreads) and benefits all parties involved, especially retail traders.
Size Improvement
In addition to price improvement, market makers can provide size improvement, which happens when the number of filled shares is greater than what's available at the NBBO. Price and size improvement together bring real savings to retail traders.
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