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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 th
by 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.
- lrm242 16y ago> 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. You continue to confuse a flash order as used by the exchange to broker/dealer internalization.
- beagle3 16y agoI stand corrected -- "flashing" used to mean all that. It goes back at least 10 years, when I started trading (and, according to Wikipedia, as far back as 1978). Now it only means what the exchange side does, and what brokers do is called "internalization". But it's the same thing. I know it's being exploited for frontrunning on the broker side, and I see no reason why it wouldn't be possible on the exchange side (even if its just 30ms -- that's more than enough to frontrun the client in the NBBO exchange at the time).
- lrm242 16y ago> 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. You continue to confuse a flash order as used by the exchange to broker/dealer internalization.