Depth improvement and adjusted price improvement on the New York stock exchange

Traditional price improvement improperly assesses large orders’ execution quality by ignoring additional liquidity depth-exceeding orders receive at the quoted price and viewing orders that “walk the book” as “disimproved”. Ignoring this additional liquidity is particularly problematic when assessing execution quality in markets with significant non-displayed liquidity. To correct this deficiency, we modify the price benchmark used to determine whether an order is price improved by making the benchmark a function of the order's size relative to the quoted depth. We document that the differences between conventional price improvement and our measure, adjusted price improvement, can be dramatic and show that the difference depends on trading volume, stock price, and volatility.