4 ms·

You don't know what you're talking about, unfortunately. No one buys order flow. The only time your order won't receive price time priority on the US equities m

by lrm242 16y ago

You don't know what you're talking about, unfortunately. No one buys order flow. The only time your order won't receive price time priority on the US equities markets is when your broker internalizes the order and matches or improves the price as compared to the NBBO. And if you're thinking flash orders then you're also wrong. Not only is the practice not used anymore, but even if you're order is flashed it will only match if the price is improved.

beagle3 16y ago
Why do you think flash orders are not practiced anymore? The SEC hasn't banned them, and AFAIK some brokers still flash their clients orders before executing them. > but even if you're order is flashed it will only match if the price is improved. I don't think you understand how flash orders work -- flash orders tell some 3rd party what YOU will be doing in the next second, enough time for that 3rd party to snatch all offers at that price, raising the price for you. Of course if you had a limit order it wouldn't match; but now, if you still want to buy those shares (which most flashed clients do, for whatever reasons), you have to pay a higher price. Incidentally, it's almost always that 3rd party which offers those shares to you -- guaranteeing their profit.
- yummyfajitas 16y ago
  I don't think you understand how flash orders work. Flash orders give some 3rd party the opportunity to fill your order. An example: if the best price is $50.00 on INET and $50.01 on ARCA, INET gives some flash trader the opportunity to fill your order at $50.01. In this case, INET receives the commission. If they decline, your order is routed to ARCA where it is filled at $50.01 (and ARCA receives the commission), and you pay a routing fee. If you really don't want to be flashed, you can always turn on the "no flash" flag in your orders. But then you run a higher risk of paying routing fees.
  - beagle3 16y ago
    There's a difference between the stated purpose of flashing, and how it is used in practice. > Flash orders give some 3rd party the opportunity to fill your order. Alternative way to look at it: Flashing advertises your order to several parties, and gives them one full second to front run you at ARCA, where the best price currently is. (Oh, and they have the option to fill it directly at ARCAs price immediately). > If they decline, your order is routed to ARCA where it is filled at $50.01 (and ARCA receives the commission), and you pay a routing fee. Except, one of the guys the order was flashed to, (who declined) has already bought that 50.01 at ARCA, so now the NBBO price is 50.02; incidentally, by a pure coincidence, it's being sold by the same guy who just bought it 50.01. I've played the HFT game for the last 10 years. Don't believe a single word of the official propaganda about why something is employed; It's all there to generate more traffic for the exchanges; e.g., in the case described above, ARCA gets two transaction fees instead of one, and the broker gets their routing fee AND some kickback from the flashee.
    - yummyfajitas 16y ago
      First of all, flashing gives one party a user-configurable time period (typically 30ms) to fill your order. A full second is nonsense. Also, the person placing the order can turn it off. Second, the motives in your hypothetical don't make sense. Direct Edge is the venue allowing flash orders. ARCA gets two commissions, but DE gets nothing. Why would DE want to give commissions to their competitors? And if this happened to any significant degree, why would customers continue to set their "please flash me" flag to True? Lastly, front running based on flash trading is illegal, not to mention pretty easy to prove in court. And it's pretty easy to find people doing it based solely on an electronic search of the tapes. If it happened to any significant degree, how come the SEC didn't find it?
      - beagle3 16y ago
        > A full second is nonsense. Also, the person placing the order can turn it off. If I'm not mistaken (and I might be, it's been awhile since I looked), Interactive Brokers were flashing their clients orders up until recently as well; they didn't call it flashing, they called it "smart routing" -- but if you opted out, you paid routing fees whereas if you opted in, those fees would often be waived. > Direct Edge is the venue allowing flash orders. ARCA gets two commissions, but DE gets nothing. DE is the last flashing exchange. They get their fees if they fill the 2nd order by the flashee, or routing fees if they direct to ARCA. The only way they get nothing is if nothing ever gets traded in the entire transaction except the first, which usually is NOT the case. > If it happened to any significant degree, how come the SEC didn't find it? Are you asking that seriously? The SEC is in bed with the industry. They don't look for anything, and they don't find anything. (google "Harry Markopolos" and "Madoff" if you want an insight into how the SEC works. Read ZeroHedge and Denninger to see DAILY examples of undeniable fraud and insider trading that the SEC never looks at. Seriously, if you trust the SEC to do anything, you shouldn't be in finance)
- lrm242 16y ago
  There is a huge nuance in what you just said. Folks, the markets are complicated. There are a ton of rules. Make sure you understand them if you want to play this game. Brokers currently have a right to internalize customer order flow. They can match that order amongst other standing client orders. They can route that order however they please. They can seek liquidity in dark pools before sending the order to the broader market. Or they can even trade against that order if they want. The only rule they must adhear to is that they must match or beat the prevailing NBBO price. Flash orders are when an exchange receives an order from a participant and then asks other participants if they want to fill it before sending it to their matching system and into the national market. These two items are hugely different. Flash orders are effectively gone even though they did nothing to harm any market participant. The only result was order flow that was permitted to flash would receive price improvement. Unfortunately, the uninformed tempest in the teapot created by Schumer and Congress prompted the SEC to propose a ban and the exchanges to eliminte the order type. It's gone. Broker/dealer internalization is here to stay. Don't expect it to get eliminated ... ever. Brokers make a ton of money doing this and there is absolutely nothing wrong with it. Why do you think there are so many sub-penny fills? If a market is 100 bid for 10.01 and 10.02 offered for 500, and you submit a order to ETrade to buy 100 at market, ETrade will do all sorts of funny stuff with your order to improve price. These days, they will hit dark pools and you might fill at 10.015. Why can they do this? Well, you got a better price and the dark pool isn't limited to penny increments because the order flow is non-displayed. > I don't think you understand how flash orders work -- flash orders tell some 3rd party what YOU will be doing in the next second, enough time for that 3rd party to snatch all offers at that price, raising the price for you. Go read about the national market system. Go read the old rules about flash orders and price improvement. Then reconsider what you've just typed.
  - beagle3 16y ago
    > There is a huge nuance in what you just said. Folks, the markets are complicated. There are a ton of rules. Make sure you understand them if you want to play this game. Having built systems that traded quadrillions in notional value (and in the process made a small percentage of that in profit), I think I have an idea what I'm talking about and how to play this game. Everything you said is true in theory, except practice is quite a bit different: ETrade will flash your order in order to get a better price; and one second later, will go to the NBBO. But some of the players they flash to will go and BUY the NBBO within that second. So when ETrade, after not having able to improve your price, goes to the NBBO, they found they can no longer fill at the price that was available just a second ago. That's unfair advantage for the flasher -- a second ago, the ask was at 10.02 and bid was 10.01, which means the fair price is somewhere in between, but definitely not more than 10.02; Now, the flasher knows there's a buyer at 10.02 -- so they buy it themselves at 10.02 and offer to sell at 10.03; In many cases, the buyer will still want to buy, making the flasher a profit of 0.01; In the worst case, the flasher can offer it again at 10.02, paying only commission on his failed trade, and is likely to sell to the same buyer. I know of institutions who actually made money that way, lots of it, with ridiculously low risk. And it's legal, because the broker is allowed to flash the order to anyone they want for one second before going to the NBBO, and the flasher has no commitment not to abuse that. > Go read about the national market system. Go read the old rules about flash orders and price improvement. Then reconsider what you've just typed. The NBBO system is broken and has been for years. The flashing technique I highlighted above is one example. During the flash crash of may 6, the CQS (and NBBO) was 20 seconds delayed, meaning you couldn't fill at the NBBO prices.

by lrm242 16y ago

beagle3 16y ago

Why do you think flash orders are not practiced anymore? The SEC hasn't banned them, and AFAIK some brokers still flash their clients orders before executing them. > but even if you're order is flashed it will only match if the price is improved. I don't think you understand how flash orders work -- flash orders tell some 3rd party what YOU will be doing in the next second, enough time for that 3rd party to snatch all offers at that price, raising the price for you. Of course if you had a limit order it wouldn't match; but now, if you still want to buy those shares (which most flashed clients do, for whatever reasons), you have to pay a higher price. Incidentally, it's almost always that 3rd party which offers those shares to you -- guaranteeing their profit.

yummyfajitas 16y ago
I don't think you understand how flash orders work. Flash orders give some 3rd party the opportunity to fill your order. An example: if the best price is $50.00 on INET and $50.01 on ARCA, INET gives some flash trader the opportunity to fill your order at $50.01. In this case, INET receives the commission. If they decline, your order is routed to ARCA where it is filled at $50.01 (and ARCA receives the commission), and you pay a routing fee. If you really don't want to be flashed, you can always turn on the "no flash" flag in your orders. But then you run a higher risk of paying routing fees.
- beagle3 16y ago
  There's a difference between the stated purpose of flashing, and how it is used in practice. > Flash orders give some 3rd party the opportunity to fill your order. Alternative way to look at it: Flashing advertises your order to several parties, and gives them one full second to front run you at ARCA, where the best price currently is. (Oh, and they have the option to fill it directly at ARCAs price immediately). > If they decline, your order is routed to ARCA where it is filled at $50.01 (and ARCA receives the commission), and you pay a routing fee. Except, one of the guys the order was flashed to, (who declined) has already bought that 50.01 at ARCA, so now the NBBO price is 50.02; incidentally, by a pure coincidence, it's being sold by the same guy who just bought it 50.01. I've played the HFT game for the last 10 years. Don't believe a single word of the official propaganda about why something is employed; It's all there to generate more traffic for the exchanges; e.g., in the case described above, ARCA gets two transaction fees instead of one, and the broker gets their routing fee AND some kickback from the flashee.
  - yummyfajitas 16y ago
    First of all, flashing gives one party a user-configurable time period (typically 30ms) to fill your order. A full second is nonsense. Also, the person placing the order can turn it off. Second, the motives in your hypothetical don't make sense. Direct Edge is the venue allowing flash orders. ARCA gets two commissions, but DE gets nothing. Why would DE want to give commissions to their competitors? And if this happened to any significant degree, why would customers continue to set their "please flash me" flag to True? Lastly, front running based on flash trading is illegal, not to mention pretty easy to prove in court. And it's pretty easy to find people doing it based solely on an electronic search of the tapes. If it happened to any significant degree, how come the SEC didn't find it?
    - beagle3 16y ago
      > A full second is nonsense. Also, the person placing the order can turn it off. If I'm not mistaken (and I might be, it's been awhile since I looked), Interactive Brokers were flashing their clients orders up until recently as well; they didn't call it flashing, they called it "smart routing" -- but if you opted out, you paid routing fees whereas if you opted in, those fees would often be waived. > Direct Edge is the venue allowing flash orders. ARCA gets two commissions, but DE gets nothing. DE is the last flashing exchange. They get their fees if they fill the 2nd order by the flashee, or routing fees if they direct to ARCA. The only way they get nothing is if nothing ever gets traded in the entire transaction except the first, which usually is NOT the case. > If it happened to any significant degree, how come the SEC didn't find it? Are you asking that seriously? The SEC is in bed with the industry. They don't look for anything, and they don't find anything. (google "Harry Markopolos" and "Madoff" if you want an insight into how the SEC works. Read ZeroHedge and Denninger to see DAILY examples of undeniable fraud and insider trading that the SEC never looks at. Seriously, if you trust the SEC to do anything, you shouldn't be in finance)
lrm242 16y ago
There is a huge nuance in what you just said. Folks, the markets are complicated. There are a ton of rules. Make sure you understand them if you want to play this game. Brokers currently have a right to internalize customer order flow. They can match that order amongst other standing client orders. They can route that order however they please. They can seek liquidity in dark pools before sending the order to the broader market. Or they can even trade against that order if they want. The only rule they must adhear to is that they must match or beat the prevailing NBBO price. Flash orders are when an exchange receives an order from a participant and then asks other participants if they want to fill it before sending it to their matching system and into the national market. These two items are hugely different. Flash orders are effectively gone even though they did nothing to harm any market participant. The only result was order flow that was permitted to flash would receive price improvement. Unfortunately, the uninformed tempest in the teapot created by Schumer and Congress prompted the SEC to propose a ban and the exchanges to eliminte the order type. It's gone. Broker/dealer internalization is here to stay. Don't expect it to get eliminated ... ever. Brokers make a ton of money doing this and there is absolutely nothing wrong with it. Why do you think there are so many sub-penny fills? If a market is 100 bid for 10.01 and 10.02 offered for 500, and you submit a order to ETrade to buy 100 at market, ETrade will do all sorts of funny stuff with your order to improve price. These days, they will hit dark pools and you might fill at 10.015. Why can they do this? Well, you got a better price and the dark pool isn't limited to penny increments because the order flow is non-displayed. > I don't think you understand how flash orders work -- flash orders tell some 3rd party what YOU will be doing in the next second, enough time for that 3rd party to snatch all offers at that price, raising the price for you. Go read about the national market system. Go read the old rules about flash orders and price improvement. Then reconsider what you've just typed.
- beagle3 16y ago
  > There is a huge nuance in what you just said. Folks, the markets are complicated. There are a ton of rules. Make sure you understand them if you want to play this game. Having built systems that traded quadrillions in notional value (and in the process made a small percentage of that in profit), I think I have an idea what I'm talking about and how to play this game. Everything you said is true in theory, except practice is quite a bit different: ETrade will flash your order in order to get a better price; and one second later, will go to the NBBO. But some of the players they flash to will go and BUY the NBBO within that second. So when ETrade, after not having able to improve your price, goes to the NBBO, they found they can no longer fill at the price that was available just a second ago. That's unfair advantage for the flasher -- a second ago, the ask was at 10.02 and bid was 10.01, which means the fair price is somewhere in between, but definitely not more than 10.02; Now, the flasher knows there's a buyer at 10.02 -- so they buy it themselves at 10.02 and offer to sell at 10.03; In many cases, the buyer will still want to buy, making the flasher a profit of 0.01; In the worst case, the flasher can offer it again at 10.02, paying only commission on his failed trade, and is likely to sell to the same buyer. I know of institutions who actually made money that way, lots of it, with ridiculously low risk. And it's legal, because the broker is allowed to flash the order to anyone they want for one second before going to the NBBO, and the flasher has no commitment not to abuse that. > Go read about the national market system. Go read the old rules about flash orders and price improvement. Then reconsider what you've just typed. The NBBO system is broken and has been for years. The flashing technique I highlighted above is one example. During the flash crash of may 6, the CQS (and NBBO) was 20 seconds delayed, meaning you couldn't fill at the NBBO prices.