Sub-Penny Price Discretion Skim
The Formal Definition
The execution mechanism where wholesale market makers provide fractional sub-penny price improvement (e.g., $0.0001 to $0.0010 per share) on retail market orders to legally fulfill best-execution duties while internalizing the trade and pocketing the vast majority of the wider bid-ask spread.
Wholesaler Retained Spread Skim = Realized Bid-Ask Spread - Sub-Penny Price Improvement Credit Passed to Client
Cole Barrett's Reality Check
The Unvarnished Bottom Line"Wholesale internalizers love to brag that they gave you 'price improvement.' You buy 500 shares, and they fill you at $0.0010 below the ask price, saving you fifty cents on the whole trade. They call that a victory. What they don't mention is that the bid-ask spread was ten cents wide, meaning they just pocketed $49.50 in spread profit while throwing you fifty cents of bone."
Interactive Simulator: Test the Math
Real-World Example: Scenario Breakdown
Examining the real numbers for: Executing a retail market buy order for 1,000 shares of a stock with an open NBBO of $50.00 Bid / $50.10 Ask ($0.10 spread)
| Execution Metric | Lit Exchange Midpoint Cross User | PFOF Sub-Penny Internalized Client |
|---|---|---|
| Fee / Rate | $0.0035/share DMA rate ($3.50 total) | $0 advertised commission |
| Spread / Buffer | Order routed directly to a lit exchange order book with midpoint routing instructions | Order routed to an off-exchange wholesale market maker under a payment for order flow agreement |
| Execution / Status | Matched against an independent institutional seller at the true $50.05 midpoint ($0.05 price improvement per share) | Wholesaler gave an advertised 'price improvement' of $0.0010 per share, filling the order at $50.099 |
| Total Cost / Result | Captured genuine midpoint price improvement on a transparent lit exchange | Received token sub-penny price improvement while wholesaler monetized the spread |
How Brokers Weaponize This Term
Review your broker's SEC Rule 605 execution quality reports. Look at the ratio of 'Price Improvement Amount' to 'Quoted Spread'. If the average price improvement is less than 10% of the prevailing quoted spread, your broker's wholesalers are using sub-penny skims to capture spread revenue.
Broker Evaluation Matrix
Cole Approves
Interactive Brokers: Routes client orders through its SmartRouting engine to actively hunt for true midpoint executions across lit exchanges rather than sub-penny wholesale internalizers.
Read Audit →Cole Flags / Avoids
Zero-Commission PFOF Apps: Routes 100% of retail market orders to wholesale internalizers that use token sub-penny price improvement to monetize customer flow.
View Trap Details →Frequently Asked Questions
What is SEC Rule 612 (The Sub-Penny Rule)?
Rule 612 prohibits market participants from *displaying* quotes in increments smaller than $0.01 for stocks priced over $1.00, though wholesale internalizers are legally permitted to *execute* trades in sub-pennies off-exchange.
Why is the SEC proposing changes to sub-penny rules?
Regulators have proposed reducing the minimum tick size to half-pennies ($0.005) or smaller for liquid stocks, allowing public exchanges to compete directly with off-exchange wholesale internalizers.