3 ms·

The point about "front running" being misused correlates with my point that every time HFT gets discussed, ppl cry "front running" and blame HFT for various ill

The point about "front running" being misused correlates with my point that every time HFT gets discussed, ppl cry "front running" and blame HFT for various ills. About liquidity providing... brokers don't generally route orders directly to an exchange. In most cases your order will get routed to a 3rd party liquidity provider, a firm who agrees to buy at the bid and sell at the ask and do so quickly. Often, these guys will pay the broker for order flow or price-improve your order to capture all of it, or both. Competition between these firms goes a long way towards guaranteeing the NBBO price that your broker is obligated to provide. Connecting the dots leads you to a conclusion that the order flow is valuable enough to them (for purposes of their own prop trading, strategic option selling, etc) that they act as market makers.

chollida1 12y ago
Some of this seems wrong. > In most cases your order will get routed to a 3rd party liquidity provider, This is only true if you are a regular person, ie using IB to buy in your rrsp or ira account. Almost exclusively, anyone who is a professional will go direct to market( DMA). They will never go through Citadel or some other liquidity provider. > Often, these guys will pay the broker for order flow Not often, always. They always pay for this, there are no freebies:) > a firm who agrees to buy at the bid and sell at the ask and do so quickly. If you can find someone who will guarentee that they will fill my buy orders at the bid and sell orders at the ask, please let me know and I'll give them all my flow:) > Competition between these firms goes a long way towards guaranteeing the NBBO price that your broker is obligated to provide. What does this even mean, even without someone buying your flow you are still guaranteed to get the NBBO price, RegNMS says this is the law. Let me be clear, 3rd party brokers have no part in guaranteeing you get the NBBO price. The law says if your order can trade at the NBBO, it must.
- encoderer 12y ago
  I'm not a fan of the point-by-point redressing so I'll just say a few things and leave you the last word if you want it. And I'm sure that there are some fascinating differences when trading as a hedge fund, and maybe you can share more about them. The process I laid out is generally "how orders get filled" for just about everybody reading this. If you know enough about how your specific orders get filled, I suppose you're not the audience I was writing for. 1. Brokers don't only send orders to 3rd party market makers because they're being paid for order flow. You're right, they won't get order flow for free, but I didn't mean to imply that they did. 2. Quoting and buying at their published bid/ask is precisely their function. Possibly we're just disagreeing on terms. The SEC's website is fairly good at explaining this flow. http://www.sec.gov/investor/pubs/tradexec.htm http://www.sec.gov/investor/pubs/tradexec.htm 3. What I'm discussing is the actual mechanism for HOW nbbo is fulfilled. Competition in the marketplace -- third party market makers and arb firms -- absolutely play a role in ensuring the efficiency of the market. If brokers had to run this infrastructure themselves, it would be non-trivial and without any financial incentives that I can think of.
  - PhantomGremlin 12y ago
    > Quoting and buying at their published bid/ask is precisely their function I think he was making a little joke about this. He said: fill my buy orders at the bid and sell orders at the ask I'm with him, I'd give all my business to someone who could do that. I could retire in one trading day if I could find someone to do that for me. This was exactly the downfall of Knight Capital Group. It only took about 45 minutes for them to lose $440 million.[1] Of course, that wasn't what you originally said, which was a firm who agrees to buy at the bid and sell at the ask hence the smiley at the end of his comment. There's a difference between "buy at the bid" and "fill my buy orders at the bid". :) [1] http://en.wikipedia.org/wiki/Knight_Capital_Group#2012_stock_trading_disruption http://en.wikipedia.org/wiki/Knight_Capital_Group#2012_stock...

chollida1 12y ago

Some of this seems wrong. > In most cases your order will get routed to a 3rd party liquidity provider, This is only true if you are a regular person, ie using IB to buy in your rrsp or ira account. Almost exclusively, anyone who is a professional will go direct to market( DMA). They will never go through Citadel or some other liquidity provider. > Often, these guys will pay the broker for order flow Not often, always. They always pay for this, there are no freebies:) > a firm who agrees to buy at the bid and sell at the ask and do so quickly. If you can find someone who will guarentee that they will fill my buy orders at the bid and sell orders at the ask, please let me know and I'll give them all my flow:) > Competition between these firms goes a long way towards guaranteeing the NBBO price that your broker is obligated to provide. What does this even mean, even without someone buying your flow you are still guaranteed to get the NBBO price, RegNMS says this is the law. Let me be clear, 3rd party brokers have no part in guaranteeing you get the NBBO price. The law says if your order can trade at the NBBO, it must.

encoderer 12y ago
I'm not a fan of the point-by-point redressing so I'll just say a few things and leave you the last word if you want it. And I'm sure that there are some fascinating differences when trading as a hedge fund, and maybe you can share more about them. The process I laid out is generally "how orders get filled" for just about everybody reading this. If you know enough about how your specific orders get filled, I suppose you're not the audience I was writing for. 1. Brokers don't only send orders to 3rd party market makers because they're being paid for order flow. You're right, they won't get order flow for free, but I didn't mean to imply that they did. 2. Quoting and buying at their published bid/ask is precisely their function. Possibly we're just disagreeing on terms. The SEC's website is fairly good at explaining this flow. http://www.sec.gov/investor/pubs/tradexec.htm http://www.sec.gov/investor/pubs/tradexec.htm 3. What I'm discussing is the actual mechanism for HOW nbbo is fulfilled. Competition in the marketplace -- third party market makers and arb firms -- absolutely play a role in ensuring the efficiency of the market. If brokers had to run this infrastructure themselves, it would be non-trivial and without any financial incentives that I can think of.
- PhantomGremlin 12y ago
  > Quoting and buying at their published bid/ask is precisely their function I think he was making a little joke about this. He said: fill my buy orders at the bid and sell orders at the ask I'm with him, I'd give all my business to someone who could do that. I could retire in one trading day if I could find someone to do that for me. This was exactly the downfall of Knight Capital Group. It only took about 45 minutes for them to lose $440 million.[1] Of course, that wasn't what you originally said, which was a firm who agrees to buy at the bid and sell at the ask hence the smiley at the end of his comment. There's a difference between "buy at the bid" and "fill my buy orders at the bid". :) [1] http://en.wikipedia.org/wiki/Knight_Capital_Group#2012_stock_trading_disruption http://en.wikipedia.org/wiki/Knight_Capital_Group#2012_stock...