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Every time I've looked into the mechanics of paying for order flow, it was just a pay-to-play dark pool with certain extra requirements (e.g. you must match X%
by yummyfajitas 10y ago
Every time I've looked into the mechanics of paying for order flow, it was just a pay-to-play dark pool with certain extra requirements (e.g. you must match X% of trades). Do you have documentation on a brokerage that provides some sort of "first peek" mechanics that might allow frontrunning?
I think we are in agreement that the main purpose of buying order flow is to price discriminate based on delta toxicity.
- mrchicity 10y agoI am not saying the mechanics allow front-running. It is just different from a dark pool or exchange in that the wholesaler guarantees execution and has some discretion over how to provide it. It's not as if Schwab pings a bunch of internalizers to say "hey, can you fill this at the NBBO?" and then routes out themselves if nobody says yes. The wholesaler must fill the order whether they want it or not, and can either wear the delta, fill it from their own inventory, or execute in the market to facilitate the trade as riskless principal. The wholesaler gets contingent orders like stop market and stop limit orders and is responsible for executing them as well. It is more like having the retail broker outsource their execution similar to how a fund may have a bank desk execute orders on their behalf, except a bank desk usually has even more discretion over execution. Hate to link to the Themis blog, but they cite the SEC here describing how internalizers, not retail brokerages, routed sell orders out to exchanges on May 6th: http://blog.themistrading.com/2010/10/the-internalizers-and-the-flash-crash-let’s-talk-real-villains/ http://blog.themistrading.com/2010/10/the-internalizers-and-...