Best route for passive trading
- Thread starter DT3
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If this is true, then isn't BYX even better in terms of getting fills since the liquidity taker gets a rebate?
Thats the thing, in some cases it is. The downside is that its really costly to post orders there. What is nice about EDGA is that its ahead of most other ECNs and it only "loses" against BATSY and BX. Its ahead of 7 and behind 2, thats a good bang for the buck for giving up the rebate (actually getting a tiny one). But perhaps PSX is also good, it pays .0015 in rebates and it costs .0026 which is less than 6 others. But thats where it gets complicated, it costs .0026 for some folks, for others it can be less. Firms that do more volume in a place can hit there first because of the discounts, so a firm might actually hit NYSE first and then PSX because they have a deal to pay less on NYSE. EDGA is so ahead of the other 7 thats unlikely to be affected by these deals. (I'm using rebate and fee schedules from early this year so this might have changed some)
I wrote an article that will go to the 2nd edition of the book that I can post here if someone is interested. I can't vouch for the complete accuracy of the information because I'm still working on this and might have to recheck the math and theory but I do use it to guide some of my decisions.
HFT is also totally aware of this, frequently when you try to join a level with a route like EDGA or the 'nuclear' option like BX or BATSY, you can frequently see that the L2 will react to that. Sometimes I use EDGA and the HFT will show up with BX, even though they were just using ARCA and EDGX before.
The problem with using the high rebate venues is that when you get taken last you will frequently be down on the trade. In a 1 cent spread stock, you will be down half a cent, assuming the fair value is the mid-point. Half a cent is more than .003, so there is that
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Thanks for the detailed response, would love to see your article. Totally agree that going for highest rebate doesn't necessarily mean the best.
The way I see it is that posting an order through different venues essentially means you are offering a different price. Assume you want to buy a NASDAQ stock and HFTs are doing their job, posting a 10.00 bid through BYX is the same as bidding 10.0015, through BX 10.0004, through Island 9.997
The cost of transaction would be the difference between the rebate and fee for taking/adding liquidity. This is how much the exchange is taking per matched share.
BYX is 0.0018-0.0015 = 0.0003
BX 0.002-0.0004 = 0.0016
Island 0.003-0.0021 = 0.0009
I got those rebate/fee numbers from IB so I am ignoring volume discounts and rebates that are not fully passed through. It looks like BYX is the best deal and your quote has the potential to "sub-penny" other orders. Also if the broker decides not to internalize a certain retail flow, they will certain give that retail order to your BYX bid. Everyone wants to trade against retail flow.
The way I see it is that posting an order through different venues essentially means you are offering a different price. Assume you want to buy a NASDAQ stock and HFTs are doing their job, posting a 10.00 bid through BYX is the same as bidding 10.0015, through BX 10.0004, through Island 9.997
The cost of transaction would be the difference between the rebate and fee for taking/adding liquidity. This is how much the exchange is taking per matched share.
BYX is 0.0018-0.0015 = 0.0003
BX 0.002-0.0004 = 0.0016
Island 0.003-0.0021 = 0.0009
I got those rebate/fee numbers from IB so I am ignoring volume discounts and rebates that are not fully passed through. It looks like BYX is the best deal and your quote has the potential to "sub-penny" other orders. Also if the broker decides not to internalize a certain retail flow, they will certain give that retail order to your BYX bid. Everyone wants to trade against retail flow.
I asked my prop manager and was told AROUC was best for limit passive orders and BATY best for removing liquidity.
Maybe it has something to do with what Daal said where if you route to EDGA you have a better chance of getting fills.
I'm just starting to dig into this so feel free to tell me if I'm wrong or suggest a better alternative. Also if there are any good articles or videos on the topic please post them. I'm suprised I haven't found much on the topic considering how important it is.
Maybe it has something to do with what Daal said where if you route to EDGA you have a better chance of getting fills.
I'm just starting to dig into this so feel free to tell me if I'm wrong or suggest a better alternative. Also if there are any good articles or videos on the topic please post them. I'm suprised I haven't found much on the topic considering how important it is.