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I don't see how taking on downside risk improves the wholesaler's position (in fact, I think the rationalization is an even more degenerate case). The fact sti

I don't see how taking on downside risk improves the wholesaler's position (in fact, I think the rationalization is an even more degenerate case). The fact still remains that the wholesaler has fabricated an order on the knowledge of a customer's pending order, which affected the execution price of the customer's order, before the customer could even know that it happened. Even if the wholesaler sent their order to an exchange and still matched with their customer, it is still front-running, as the wholesaler is using knowledge of their customer's order to, essentially, eliminate all possible price improvements. So, what is being called a "limit order" is just code for "we might just fill your order at your limit [when there are no market orders], if we think we can make money off [front-running] your order with our own". It would perhaps be acceptable if the wholesaler offered some kind of kick-back on any profits made, but that would need to be a different kind of order and I'm not aware of anywhere that does it.

kasey_junk 10y ago
Your broker or the wholesaler both have a choice: 1) match the order with the NBBO. 2) send the order to the exchange. If your limit is better than the NBBO, then they are required by the law to price improve it. Further, the nature of their agreements with your broker are such that they are required to maintain a price improvement level (that should be better than NBBO compliance). That is, incidentally also largely the requirement the exchanges operate under as well. A limit order doesn't have anything to do with the existence or non-existence of market orders, it has to do with your limit and the NBBO. The way they make money is not by changing the market against your interests, but instead booking the spread (and in fact the reason they like retail order flow is that it is naturally uncorrelated so the spread is more even). The customer does in fact know that this is happening as it is a regulatory requirement that they disclose it. I suspect that lots of whole sellers would be happy to kick back profits, if the retail customer was also on the hook to back the losses. Instead, they aren't and they get heavily discounted (to the point that it is now free to trade) trading costs instead.
- jsprogrammer 10y ago
  This is all hand-waving. Neither you or tptacek have altered the fundamental reality: >In the scenario presented, the wholesaler receives your order, then executes its own orders, then fills your order based on its own executions (which you are unaware of). >The way they make money is not by changing the market against your interests, Oh, but they do. They fabricate an order in response to yours. If they did not act, your order would not have filled at $0.001 under your limit. >but instead booking the spread (and in fact the reason they like retail order flow is that it is naturally uncorrelated so the spread is more even). You can call it whatever you want, the wholesaler is manipulating the market to their advantage. The wholesaler knows the price is likely to improve, so it arbitrarily truncates your order and infills its own account with the improvements.
  - kasey_junk 10y ago
    Likely is the important part of your final sentence. They are not acting against your interests and they are taking on risk in the market to your benefit. Is it limited risk? Of course, that's their job. Finally, I'd ask, what is your point? That the law is flawed? OK, then work to change it. But know that lots of people have done their own research and come down in favor of the execution cost benefits of wholesellers.
    - jsprogrammer 10y ago
      >They are not acting against your interests Of course they are. Had they not acted, you would have had a chance at price improvement. Instead, they took your chance for a token payment.
      - kasey_junk 10y ago
        How?
        jsprogrammer 10y ago
        https://news.ycombinator.com/item?id=11667688 https://news.ycombinator.com/item?id=11667688

kasey_junk 10y ago

Your broker or the wholesaler both have a choice: 1) match the order with the NBBO. 2) send the order to the exchange. If your limit is better than the NBBO, then they are required by the law to price improve it. Further, the nature of their agreements with your broker are such that they are required to maintain a price improvement level (that should be better than NBBO compliance). That is, incidentally also largely the requirement the exchanges operate under as well. A limit order doesn't have anything to do with the existence or non-existence of market orders, it has to do with your limit and the NBBO. The way they make money is not by changing the market against your interests, but instead booking the spread (and in fact the reason they like retail order flow is that it is naturally uncorrelated so the spread is more even). The customer does in fact know that this is happening as it is a regulatory requirement that they disclose it. I suspect that lots of whole sellers would be happy to kick back profits, if the retail customer was also on the hook to back the losses. Instead, they aren't and they get heavily discounted (to the point that it is now free to trade) trading costs instead.

jsprogrammer 10y ago
This is all hand-waving. Neither you or tptacek have altered the fundamental reality: >In the scenario presented, the wholesaler receives your order, then executes its own orders, then fills your order based on its own executions (which you are unaware of). >The way they make money is not by changing the market against your interests, Oh, but they do. They fabricate an order in response to yours. If they did not act, your order would not have filled at $0.001 under your limit. >but instead booking the spread (and in fact the reason they like retail order flow is that it is naturally uncorrelated so the spread is more even). You can call it whatever you want, the wholesaler is manipulating the market to their advantage. The wholesaler knows the price is likely to improve, so it arbitrarily truncates your order and infills its own account with the improvements.
- kasey_junk 10y ago
  Likely is the important part of your final sentence. They are not acting against your interests and they are taking on risk in the market to your benefit. Is it limited risk? Of course, that's their job. Finally, I'd ask, what is your point? That the law is flawed? OK, then work to change it. But know that lots of people have done their own research and come down in favor of the execution cost benefits of wholesellers.
  - jsprogrammer 10y ago
    >They are not acting against your interests Of course they are. Had they not acted, you would have had a chance at price improvement. Instead, they took your chance for a token payment.
    - kasey_junk 10y ago
      How?
      - jsprogrammer 10y ago
        https://news.ycombinator.com/item?id=11667688 https://news.ycombinator.com/item?id=11667688