8 ms·

Paying for "dumb money" order flow, it's how everyone was able to go commission free, by selling access to it.

by cma 6y ago

sesuximo 6y ago
This isn’t true for every firm, but a lot of them do it. I think it’s bad (it’s weird/unfair), but on the other hand I am happy not paying commission/getting orders filled at prices often a bit better than advertised on my broker’s app, so maybe it’s ok? Idk.
- sp527 6y ago
  I’d argue it’s not bad at all. It very cleanly aligns incentives in a way that benefits both sides. Another way to look at it is that there’s an “implied commission”, paid in the form of a perhaps slightly inflated purchase price, that largely doesn’t affect retail investors. And this all works out for quant firms because they make money off this at volume, at near zero marginal cost. In fact, it’s odd that commission free trading didn’t happen a lot sooner. Etrade, Schwab, etc were rent seekers.
- badfrog 6y ago
  > I think it’s bad (it’s weird/unfair) How is it bad or unfair? Everybody wins: you get a better price, the market maker does a trade they're happy with, and your broker gets a little bit of money.
  - sesuximo 6y ago
    I think it’s a little unfair compared to letting people put their orders on exchanges directly
    - badfrog 6y ago
      You are guaranteed a price that is equal or better than what you'd get on the exchange. Why would you want to bypass that?
      - sesuximo 6y ago
        Well “the price” might be totally different if there were no off-exchange orders. But I’m sort of being a devil’s advocate... I agree with your argument in practice since I don’t expect to see such open exchanges anytime soon
        badfrog 6y ago
        > Well “the price” might be totally different if there were no off-exchange orders. I'm not sure what that means, but there's no scenario in which you'd get a worse price. That would be illegal under the Reg NMS order protection rule. https://www.investopedia.com/terms/o/order-protection-rule.asp https://www.investopedia.com/terms/o/order-protection-rule.a...
        sesuximo 6y ago
        You won’t get a worse price than what the exchange says is the price, but that price Is a moving target; if all competitors could see all orders, the price would move. Idk if it makes a difference on average but it is a difference
fractionalhare 6y ago
Order flow has been sold for much longer than the more recent commission-free trading trend, which was primarily driven by Robinhood. Robinhood just decided they'd sell order flow without also taking commission. More to the point: the primary consumer of order flow is market making HFTs, which DE Shaw is not. Stat arb/quant trading firms don't rely on market making rebates for trading profits.
- Ntrails 6y ago
  The suggestion above is that GP simply doesn't believe stat arb is a thing. Which I know to be untrue, or the level of cover up is quite impressive
smabie 6y ago
Quant fund are not involved in latency arbitrage. HFT is a completely different space, and most HFT firms are prop shops, not funds. Most quant strategies aren't really dependent on insanely fast execution. They may hold a position for weeks or months at a time.
- nojito 6y ago
  Most if not all the highly successful and most secretive quant funds execute hundreds of thousands trades per day...while not considered to be "HFT"...the idea of trading hundreds or thousands positions per second is quite a high frequency.
  - hchz 6y ago
    This is algo trading, or execution optimization. They aren't measuring the market / order book and then reacting at high frequency. They are reacting at low frequency and then the execution is optimized to minimize losses caused by market feedback. This is a very important distinction if you hold the view that HFT risks destabilizing markets.
  - smabie 6y ago
    Most quant shops are not turning over thousands of positions everyday, the trading costs alone would be ridiculous. But regardless, HFT usually means latency arb, not just trading a lot. There's a misperception that quant funds are making money on slight mispricings, but while I can't speak for all funds of course, this isn't generally true. Quant funds are much closer to buy and hold long term investors than they are to HFT firms.
- deleted 6y ago
  [deleted]

Paying for "dumb money" order flow, it's how everyone was able to go commission free, by selling access to it.

by cma 6y ago

Paying for "dumb money" order flow, it's how everyone was able to go commission free, by selling access to it.

This isn’t true for every firm, but a lot of them do it. I think it’s bad (it’s weird/unfair), but on the other hand I am happy not paying commission/getting orders filled at prices often a bit better than advertised on my broker’s app, so maybe it’s ok? Idk.

sp527 6y ago
I’d argue it’s not bad at all. It very cleanly aligns incentives in a way that benefits both sides. Another way to look at it is that there’s an “implied commission”, paid in the form of a perhaps slightly inflated purchase price, that largely doesn’t affect retail investors. And this all works out for quant firms because they make money off this at volume, at near zero marginal cost. In fact, it’s odd that commission free trading didn’t happen a lot sooner. Etrade, Schwab, etc were rent seekers.
badfrog 6y ago
> I think it’s bad (it’s weird/unfair) How is it bad or unfair? Everybody wins: you get a better price, the market maker does a trade they're happy with, and your broker gets a little bit of money.
- sesuximo 6y ago
  I think it’s a little unfair compared to letting people put their orders on exchanges directly
  - badfrog 6y ago
    You are guaranteed a price that is equal or better than what you'd get on the exchange. Why would you want to bypass that?
    - sesuximo 6y ago
      Well “the price” might be totally different if there were no off-exchange orders. But I’m sort of being a devil’s advocate... I agree with your argument in practice since I don’t expect to see such open exchanges anytime soon
      - badfrog 6y ago
        > Well “the price” might be totally different if there were no off-exchange orders. I'm not sure what that means, but there's no scenario in which you'd get a worse price. That would be illegal under the Reg NMS order protection rule. https://www.investopedia.com/terms/o/order-protection-rule.asp https://www.investopedia.com/terms/o/order-protection-rule.a...
        sesuximo 6y ago
        You won’t get a worse price than what the exchange says is the price, but that price Is a moving target; if all competitors could see all orders, the price would move. Idk if it makes a difference on average but it is a difference

fractionalhare 6y ago

Order flow has been sold for much longer than the more recent commission-free trading trend, which was primarily driven by Robinhood. Robinhood just decided they'd sell order flow without also taking commission. More to the point: the primary consumer of order flow is market making HFTs, which DE Shaw is not. Stat arb/quant trading firms don't rely on market making rebates for trading profits.

Ntrails 6y ago
The suggestion above is that GP simply doesn't believe stat arb is a thing. Which I know to be untrue, or the level of cover up is quite impressive

smabie 6y ago

Quant fund are not involved in latency arbitrage. HFT is a completely different space, and most HFT firms are prop shops, not funds. Most quant strategies aren't really dependent on insanely fast execution. They may hold a position for weeks or months at a time.

nojito 6y ago
Most if not all the highly successful and most secretive quant funds execute hundreds of thousands trades per day...while not considered to be "HFT"...the idea of trading hundreds or thousands positions per second is quite a high frequency.
- hchz 6y ago
  This is algo trading, or execution optimization. They aren't measuring the market / order book and then reacting at high frequency. They are reacting at low frequency and then the execution is optimized to minimize losses caused by market feedback. This is a very important distinction if you hold the view that HFT risks destabilizing markets.
- smabie 6y ago
  Most quant shops are not turning over thousands of positions everyday, the trading costs alone would be ridiculous. But regardless, HFT usually means latency arb, not just trading a lot. There's a misperception that quant funds are making money on slight mispricings, but while I can't speak for all funds of course, this isn't generally true. Quant funds are much closer to buy and hold long term investors than they are to HFT firms.
deleted 6y ago
[deleted]