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The funds then get a free look at these orders where if they are beneficial to them they can fill the order, or if they aren't, then they can pass the order ont

The funds then get a free look at these orders where if they are beneficial to them they can fill the order, or if they aren't, then they can pass the order onto an exchange. This is simply false. For example, IB describes the mechanism here: Liquidity Provider Relationships: IB has entered arrangements with certain institutions under which such institutions may send orders to IB at or near the NBBO. These orders are held within the IB system and are not displayed in the national market. If another IB customer order could be immediately executed against such an order held in the IB system (at the NBBO), the orders may be crossed and the execution reported to the National Market System... http://www.arcacapitalinvestments.com/new/arcacapitalinvestments/images/Rule%20606%20Interactive%20Brokers.pdf?advisorid=4024665 http://www.arcacapitalinvestments.com/new/arcacapitalinvestm... So no, the liquidity providers don't get a "free look". They get to place orders (before you do) and your brokerage fills them if there is a price match. The price is always at least as good as in the national markets, modulo the limitations of physics/CAP theorem/etc. The purpose here is to enable price discrimination - you pay a lower price for liquidity (since you have less adverse selection), Goldman pays a higher price (since they have more adverse selection).

deleted 10y ago
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chollida1 10y ago
> This is simply false. For example, IB describes the mechanism here Well to be fair, i never mentioned IB, you did. I'm correct on this issue. Let's leave IB out of this as what you describe does happen but is a completely separate issue from selling order flow. First off Schwab has already publicly admitted they sell their order flow. I've talked to 4 Canadian banks who do the same. The internalizers who buy the flow are then allowed to either fill the order or pass it along, to the market, they get to see the order before it gets to the market, this is the free look i was talking about. You may not be aware this happens but it does. I've literally talked to people on both sides of this who freely admit what they do. its currently legal, but I don't think it will be for much longer.
- yummyfajitas 10y ago
  Selling order flow refers to the exact mechanism IB just described. It's mechanically no different from a dark pool (such as IEX, the heroes in Flash Boys). If you have evidence otherwise, by all means post documentation describing the specific mechanics of how matching works. Simply citing news articles that use the word "sell order flow" doesn't count. I just cited IB because their docs are very detailed and because I know them well.
  - mrchicity 10y ago
    You two are talking about different things. They are similar but the mechanics are different. IB's example is an internalization pool where liquidity providers may post quotes and potentially fill within the NBBO when they have a desire to match/improve the quote. The KCG and Citadel business is called wholesaling. A broker like Schwab has market orders or marketable limit orders from customers. They make an agreement with a wholesale market maker like Citadel to fill all of those orders up to a certain size possibly, within the NBBO, in exchange for a fee and some price improvement requirements. So imagine you're Citadel. You have a stream of incoming orders that you commit to fill at the current market prices with a bit of improvement. If the order flow is small, you just sit on the delta waiting for flow in the other direction or trade out patiently on exchange to make a spread. If the flow becomes largely imbalanced, you can liquidate the delta aggressively on the public market to hedge at a very small cost. Say the NBBO is 100.50 bid 100.51 offer and you just sold 500 shares at 100.5099 and bought 2000 at 100.5001. You can dump the 1500 residual on the exchange bid or in dark pools, whatever, and all you lose is the price improvement you gave and fees, which are smaller than the spread you make on a "good" trade. In effect, the wholesaler is cherry picking and getting a cheap option to make a spread. All the small retail trades that are easy to capture spread on get siphoned off the exchanges, and they're left with only the imbalanced toxic ones. This is good for the wholesaler, good for the retail trader (he gets a bit of price improvement and lower trading commission), bad for the exchanges, and bad for on-exchange market makers like most HFT firms. It's arguably "fair" to price uninformed flows differently, it's very common in some markets like FX, but locking that up behind opaque pricing agreements where only a handful of firms participate isn't. Most market making firms would gladly compete to offer even more sub-penny price improvement to retail trades, and there are even a few exchange programs that tried to do this but never got much traction.
lintiness 10y ago
it's a ridiculous way for them to steal on trade-throughs. come on, don't defend this garbage. there's no reason not to display except to let it trade lower, buy, then scalp the customer's order risk-free.
- yummyfajitas 10y ago
  Can you explain the mechanism by which they steal? I.e., the concrete sequence of messages and trades?
  - lintiness 10y ago
    sure, the most obvious is they steal a trade which you the customer were entitled to. if you're bidding for 1000 shares in something that trades 15000 shares a day, they lean on your bid, buy on a different exchange than you're posted on, take your trade, and try to flip it for the spread. there are many many other ways they rip you off, but stealing doesn't necessarily mean a trade through -- even though you'll never (i mean this quite literally) NEVER - get a fill on a limit order with ib unless it trades through you.
    - yummyfajitas 10y ago
      Can you explicitly write out the sequence of events? Something like this, but obviously not so snarky: 1. Send a limit order for 1000@$20 to my brokerage. <- This part I understand. 2. "Lean on your bid?" <- Not a valid message in FIX. 3. Do flips. <- Acrobats do this, not brokerages. 4. Make a profit
      - lintiness 10y ago
        i'm clearly talking to a real expert here. sure, i'll pretend it's 1996 again, and I haven't spend the last 19 years making a living trading equities. 1. send limit order 2. broker sells said order to timberhill (ib) 3. timberhill places limit order on exchange -- let's call it the nonsense exchange since that's exactly what it is. 4. timberhill bids the same price or say 1/100th ahead of my order (leans on me) on real exchanges. 5. timerbhill takes the next trade at my price while leaving me unfilled (my order still hasn't executed even though it should have). 6. timberhill offers the shares i should have bought at price inside the current best offer. it's funny; i checked your blog posts about hft, and your solutions are the opposite of what's required to end the bullshit. the market would be much better served as a real marketplace if it enforced the penny increment rule (brokers currently sub penny the fuck out of every order on the market in the name of phony "price improvement"), and it consolidated venues (most trading venues today are holding places for customer order flow to be ripped off in the manner i've already explained).

deleted 10y ago

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chollida1 10y ago

> This is simply false. For example, IB describes the mechanism here Well to be fair, i never mentioned IB, you did. I'm correct on this issue. Let's leave IB out of this as what you describe does happen but is a completely separate issue from selling order flow. First off Schwab has already publicly admitted they sell their order flow. I've talked to 4 Canadian banks who do the same. The internalizers who buy the flow are then allowed to either fill the order or pass it along, to the market, they get to see the order before it gets to the market, this is the free look i was talking about. You may not be aware this happens but it does. I've literally talked to people on both sides of this who freely admit what they do. its currently legal, but I don't think it will be for much longer.

yummyfajitas 10y ago
Selling order flow refers to the exact mechanism IB just described. It's mechanically no different from a dark pool (such as IEX, the heroes in Flash Boys). If you have evidence otherwise, by all means post documentation describing the specific mechanics of how matching works. Simply citing news articles that use the word "sell order flow" doesn't count. I just cited IB because their docs are very detailed and because I know them well.
- mrchicity 10y ago
  You two are talking about different things. They are similar but the mechanics are different. IB's example is an internalization pool where liquidity providers may post quotes and potentially fill within the NBBO when they have a desire to match/improve the quote. The KCG and Citadel business is called wholesaling. A broker like Schwab has market orders or marketable limit orders from customers. They make an agreement with a wholesale market maker like Citadel to fill all of those orders up to a certain size possibly, within the NBBO, in exchange for a fee and some price improvement requirements. So imagine you're Citadel. You have a stream of incoming orders that you commit to fill at the current market prices with a bit of improvement. If the order flow is small, you just sit on the delta waiting for flow in the other direction or trade out patiently on exchange to make a spread. If the flow becomes largely imbalanced, you can liquidate the delta aggressively on the public market to hedge at a very small cost. Say the NBBO is 100.50 bid 100.51 offer and you just sold 500 shares at 100.5099 and bought 2000 at 100.5001. You can dump the 1500 residual on the exchange bid or in dark pools, whatever, and all you lose is the price improvement you gave and fees, which are smaller than the spread you make on a "good" trade. In effect, the wholesaler is cherry picking and getting a cheap option to make a spread. All the small retail trades that are easy to capture spread on get siphoned off the exchanges, and they're left with only the imbalanced toxic ones. This is good for the wholesaler, good for the retail trader (he gets a bit of price improvement and lower trading commission), bad for the exchanges, and bad for on-exchange market makers like most HFT firms. It's arguably "fair" to price uninformed flows differently, it's very common in some markets like FX, but locking that up behind opaque pricing agreements where only a handful of firms participate isn't. Most market making firms would gladly compete to offer even more sub-penny price improvement to retail trades, and there are even a few exchange programs that tried to do this but never got much traction.

lintiness 10y ago

it's a ridiculous way for them to steal on trade-throughs. come on, don't defend this garbage. there's no reason not to display except to let it trade lower, buy, then scalp the customer's order risk-free.

yummyfajitas 10y ago
Can you explain the mechanism by which they steal? I.e., the concrete sequence of messages and trades?
- lintiness 10y ago
  sure, the most obvious is they steal a trade which you the customer were entitled to. if you're bidding for 1000 shares in something that trades 15000 shares a day, they lean on your bid, buy on a different exchange than you're posted on, take your trade, and try to flip it for the spread. there are many many other ways they rip you off, but stealing doesn't necessarily mean a trade through -- even though you'll never (i mean this quite literally) NEVER - get a fill on a limit order with ib unless it trades through you.
  - yummyfajitas 10y ago
    Can you explicitly write out the sequence of events? Something like this, but obviously not so snarky: 1. Send a limit order for 1000@$20 to my brokerage. <- This part I understand. 2. "Lean on your bid?" <- Not a valid message in FIX. 3. Do flips. <- Acrobats do this, not brokerages. 4. Make a profit
    - lintiness 10y ago
      i'm clearly talking to a real expert here. sure, i'll pretend it's 1996 again, and I haven't spend the last 19 years making a living trading equities. 1. send limit order 2. broker sells said order to timberhill (ib) 3. timberhill places limit order on exchange -- let's call it the nonsense exchange since that's exactly what it is. 4. timberhill bids the same price or say 1/100th ahead of my order (leans on me) on real exchanges. 5. timerbhill takes the next trade at my price while leaving me unfilled (my order still hasn't executed even though it should have). 6. timberhill offers the shares i should have bought at price inside the current best offer. it's funny; i checked your blog posts about hft, and your solutions are the opposite of what's required to end the bullshit. the market would be much better served as a real marketplace if it enforced the penny increment rule (brokers currently sub penny the fuck out of every order on the market in the name of phony "price improvement"), and it consolidated venues (most trading venues today are holding places for customer order flow to be ripped off in the manner i've already explained).