7 ms·

If I'm buying with limit orders, can someone explain how I'd get a bad deal on one of these exchanges?

kasey_junk 10y ago
The internalizer could price improve you to an "incorrect" NBBO price and pocket the difference.
chollida1 10y ago
It's a good question. If you are a retail trader, you should almost always use limit orders. You can never get a worse fill than what you ask for but the internalizer can make money off your order and you can miss out on market moves that occur in the second after you place your order. if you are fine getting price that you put your limit order in for then as far as you are concerned, you'll be fine. As with all things market micro structure related, nanex.net has a good writeup on this. I'm not sure how often this scenario occurs as I've never worked for an internalizer but its http://www.nanex.net/aqck2/What-Every-Retail-Investor-Needs-to-Know.pdf http://www.nanex.net/aqck2/What-Every-Retail-Investor-Needs-... Check out the section called "Marketable Limit Orders". > For example: the Wholesaler receives a retail order to buy 2000 shares at $10.03 or better (lower) when the SIP shows a total of 2000 shares offered at the best offer price of 10.01. 1. Wholesaler buys 300 from one exchange at $10.01, and immediately, 1700 shares that were available on other exchanges disappear, causing the best offer price to move to $10.02. 2. Wholesaler buys 400 at $10.02, and again, sell orders on other exchanges disappear, causing the best offer price to move to $10.03. 3. Wholesaler sells short remaining 1300 shares at $10.0290 to retail investor, providing a $0.0010 price improvement relative to the $10.03 SIP offer price at time of execution. 4. Within seconds, stock reverts back to $10.01 offered. 5. Wholesaler covers short by buying 1300 shares at $10.01. > By quickly influencing the price of the stock, perhaps by less optimal routing, then directly filling the order at an execution price away from the original NBBO at time of Order Receipt, the Wholesaler profits from the $0.019 change on 1300 shares ($24.70), less any "price improvement" given to the retail investor, less the $4.00 Payment for Order flow paid to the Retail Broker (2000 shares x .0020 per share) and $6 in exchange fees (maximum SEC fee $0.0030 per share x 2000 shares).
- yummyfajitas 10y ago
  This sequence of events is wrong. Here's how it goes: 0. The internalizer tells the brokerage that they want to buy 2000@$10.03. 1. Customer places a buy order 2000@$10.03. 2. Brokerage looks at the internalizer and at the NBBO. Brokerage realizes the NBBO is better than the internalizer and so routes a 700@$10.02 to the public markets as per their legal obligation due to Reg NMS. 3. Brokerage routes the remaining 1300 shares to the internalizer, where they are filled at $10.0290. Customer trades are 300@$10.01, 400@$10.02, 1300@$10.029, resulting in (as you noted) a price improvement to the retail customer. The only this doesn't benefit the customer is if (as kasey_junk notes) the brokerage is using an incorrect NBBO. If you believe a brokerage is doing this please report them to the SEC for violating Reg NMS.
  - dguaraglia 10y ago
    Right, so the reason all these banks run extremely expensive HFT divisions is to guarantee the best possible price to their customers. Got it. I'm glad they have our back! /s As someone who has actually seen the scenario described above play out, I'm not so sure: stock doesn't move for minutes at a low volume time of day, the moment I place my limit order the price is suddenly higher than my limit; rinse and repeat. I've seen this happen enough times to make me believe Reg NMS is just another regulation they've found a plausible deniability around (BTW, before you tell me "prices going up when you place a big order is how the market works", I've tested this with 100 share orders, so there was no order split going on. I still got priced out.)
    - kasey_junk 10y ago
      I think everyone is right to be suspicious of payment for order flow, on the surface it does seem hard to get the incentives right. That said, in your scenario (you were prevented from trading) how does anyone make money? You were (probably) paying for a trade (which did not happen) and you were using infrastructure that costs money (placing orders), and no one was able to trade against you. That is not a great business model... Also, none of the groups we are talking about are banks.
deleted 10y ago
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randomname2 10y ago
Faster players can actually profit off you both when using a market order or when using a limit order. Interestingly, for small retail trades in liquid stocks, using a market order can be better as the internalizer software classes you as "dumb retail", giving you the best fill (as they need to make their 605 reports look good). An excellent explainer can be found at http://www.nanex.net/aqck2/What-Every-Retail-Investor-Needs-to-Know.pdf http://www.nanex.net/aqck2/What-Every-Retail-Investor-Needs-...
klipt 10y ago
> If I'm buying with limit orders, can someone explain how I'd get a bad deal No idea if this actually happens on those exchanges, but: Suppose you place a limit order to sell STCK for $x and I only execute it (giving you $x) if the price goes above $x+1. Someone's making $1 on that spread and it definitely isn't you. Conversely you place a limit order to buy STCK for $x and I only execute it (costing you $x) if the price drops below $x-1.

The internalizer could price improve you to an "incorrect" NBBO price and pocket the difference.

It's a good question. If you are a retail trader, you should almost always use limit orders. You can never get a worse fill than what you ask for but the internalizer can make money off your order and you can miss out on market moves that occur in the second after you place your order. if you are fine getting price that you put your limit order in for then as far as you are concerned, you'll be fine. As with all things market micro structure related, nanex.net has a good writeup on this. I'm not sure how often this scenario occurs as I've never worked for an internalizer but its http://www.nanex.net/aqck2/What-Every-Retail-Investor-Needs-to-Know.pdf http://www.nanex.net/aqck2/What-Every-Retail-Investor-Needs-... Check out the section called "Marketable Limit Orders". > For example: the Wholesaler receives a retail order to buy 2000 shares at $10.03 or better (lower) when the SIP shows a total of 2000 shares offered at the best offer price of 10.01. 1. Wholesaler buys 300 from one exchange at $10.01, and immediately, 1700 shares that were available on other exchanges disappear, causing the best offer price to move to $10.02. 2. Wholesaler buys 400 at $10.02, and again, sell orders on other exchanges disappear, causing the best offer price to move to $10.03. 3. Wholesaler sells short remaining 1300 shares at $10.0290 to retail investor, providing a $0.0010 price improvement relative to the $10.03 SIP offer price at time of execution. 4. Within seconds, stock reverts back to $10.01 offered. 5. Wholesaler covers short by buying 1300 shares at $10.01. > By quickly influencing the price of the stock, perhaps by less optimal routing, then directly filling the order at an execution price away from the original NBBO at time of Order Receipt, the Wholesaler profits from the $0.019 change on 1300 shares ($24.70), less any "price improvement" given to the retail investor, less the $4.00 Payment for Order flow paid to the Retail Broker (2000 shares x .0020 per share) and $6 in exchange fees (maximum SEC fee $0.0030 per share x 2000 shares).

yummyfajitas 10y ago
This sequence of events is wrong. Here's how it goes: 0. The internalizer tells the brokerage that they want to buy 2000@$10.03. 1. Customer places a buy order 2000@$10.03. 2. Brokerage looks at the internalizer and at the NBBO. Brokerage realizes the NBBO is better than the internalizer and so routes a 700@$10.02 to the public markets as per their legal obligation due to Reg NMS. 3. Brokerage routes the remaining 1300 shares to the internalizer, where they are filled at $10.0290. Customer trades are 300@$10.01, 400@$10.02, 1300@$10.029, resulting in (as you noted) a price improvement to the retail customer. The only this doesn't benefit the customer is if (as kasey_junk notes) the brokerage is using an incorrect NBBO. If you believe a brokerage is doing this please report them to the SEC for violating Reg NMS.
- dguaraglia 10y ago
  Right, so the reason all these banks run extremely expensive HFT divisions is to guarantee the best possible price to their customers. Got it. I'm glad they have our back! /s As someone who has actually seen the scenario described above play out, I'm not so sure: stock doesn't move for minutes at a low volume time of day, the moment I place my limit order the price is suddenly higher than my limit; rinse and repeat. I've seen this happen enough times to make me believe Reg NMS is just another regulation they've found a plausible deniability around (BTW, before you tell me "prices going up when you place a big order is how the market works", I've tested this with 100 share orders, so there was no order split going on. I still got priced out.)
  - kasey_junk 10y ago
    I think everyone is right to be suspicious of payment for order flow, on the surface it does seem hard to get the incentives right. That said, in your scenario (you were prevented from trading) how does anyone make money? You were (probably) paying for a trade (which did not happen) and you were using infrastructure that costs money (placing orders), and no one was able to trade against you. That is not a great business model... Also, none of the groups we are talking about are banks.

deleted 10y ago

[deleted]

randomname2 10y ago

Faster players can actually profit off you both when using a market order or when using a limit order. Interestingly, for small retail trades in liquid stocks, using a market order can be better as the internalizer software classes you as "dumb retail", giving you the best fill (as they need to make their 605 reports look good). An excellent explainer can be found at http://www.nanex.net/aqck2/What-Every-Retail-Investor-Needs-to-Know.pdf http://www.nanex.net/aqck2/What-Every-Retail-Investor-Needs-...

klipt 10y ago

> If I'm buying with limit orders, can someone explain how I'd get a bad deal No idea if this actually happens on those exchanges, but: Suppose you place a limit order to sell STCK for $x and I only execute it (giving you $x) if the price goes above $x+1. Someone's making $1 on that spread and it definitely isn't you. Conversely you place a limit order to buy STCK for $x and I only execute it (costing you $x) if the price drops below $x-1.