Brokers who do not fill limit orders at non-best bid/ask

[NasiWarrior]

I'm looking for a broker that would not internalize my orders on US futures exchanges.

Example:

best ask: 870.50...

Where I'd bid: 871.50 Limit Order, getting filled at 870.50.

Anyone?

 

[BondTrader50]

Quote from NasiWarrior:

I'm looking for a broker that would not internalize my orders on US futures exchanges.

Example:

best ask: 870.50...

Where I'd bid: 871.50 Limit Order, getting filled at 870.50.

Anyone?

You prefer the higher price?

 

[LeeD]

One of the reasons to avoid "internalization" in equities is a trader may loose the payment for adding liquidity.

In futures, I believe, internalized orders are illegal in the US.

Edit: You may occasionally get "improved" price on a limit order on an exchange. It's not evideance of "internalization" on its own.

However, in your example you bid above the best ask price and was filled at best ask. This is how an exchange normally operates and it is not either "price improvement" or result of order "internalization". Bids substantially above best ask are filled like "market" orders.

Second edit: If you wanted the buy order to be only triggered if the price rises to 871.50, you should have used market if touched or limit of touched type of order. These are effectively stop-market and stop-limit orders except you use them to enter a position and not to close and existing position.

 

[NasiWarrior]

Let's say that the ask side of the book is offered like this:

Price Size

5.25 20
5.00 20
4.75 30


1. Trader bids Limit $5.25 x 20.
2. Ask 4.75 x 30 is part of the brokers trading algo (above the VWAP).
3. Broker takes the order from customer.
4. Then Broker pulls his best ask....
5. Brokers hits the next best ask from the exchange ($5.00).
6. Brokers then re-sells inventory to Customer at 5.25 (not-held).

Is it really illegal for your broker to front-run you like above example?

Some brokers operate separate entities for different parts of their operations, right?

Do we know which brokers do & do not operate like this?

 

[LeeD]

Quote from NasiWarrior:

5. Brokers hits the next best ask from the exchange ($5.00).
6. Brokers then re-sells inventory to Customer at 5.25 (not-held).

Is it really illegal for your broker to front-run you like above example?

I believe the combination of these 2 steps would be illegal. Brokers have fiduciary duty to send client orders to the exchange before the broker's own orders. There are precedents of "big name" banks successfully sued for it by individuals.

This is for equities. Futures and options orders are always sent to the exchange.

Quote from NasiWarrior:

Some brokers operate separate entities for different parts of their operations, right?

There supposed to be "Chinese Wall" between brokerage and market-making. However, many "institutional" brokers run dealing desks that service "block" orders. This try to, for example, execute an order a few times average daily volume by finding another client willing to trade in this size.

Quote from NasiWarrior:

Do we know which brokers do & do not operate like this?

Just find a broker that provides an option to always send an order to a specific exchange. If you order adds liquidity you will actually see your size appearing on marklet depth screen.

 

[NasiWarrior]

Thanks for your replies, LeeD.

Despite the laws that exist, I still think that brokers can at least match orders off-exchange, and given then chance: they'd certainly tweak their matching engine to their own advantage.

That said; I'd have a better taste in my mouth if I was more profitable!

Cheers!

 

[WinstonTJ]

OP, pretty sure in futures markets you have to take the price improvement. Also there is no adding or removing liquidity.

No idea whether or not brokers internalize futures or not as I don't trade them.

 

[stock777]

yeah, tj cant front run futures.

 

[McBet]

Quote from WinstonTJ:

No idea whether or not brokers internalize futures or not as I don't trade them.

No evidence of sub-pennying (sub-minTicking more like) in the futures markets so far. But. In the data feed supplied by my broker (IB) most implied futures spread prices (e.g. calendar spread quotes) are narrower than the true market ones... e.g. penny increments when the minTick is 0.05 in those infamously anti-decimalized VIX futures (they were only 0.01-wide pre-2009 you know). This so far serves no purpose other than pure misinformation, just to obscure the real quotes, which you have to program yourself to see. This applies to more liquid futures spreads as well. So brokers are perfectly positioned to internalize those markets as well, just relax the legislation. They have their market making arm at the ready.

Don't get me wrong, traders should lobby for narrower spreads. Overcoming the bid/ask spread in futures eats up roughly 1% of your capital each month if you make just 2 ES trades per day.* Imagine how much money you could save if brokers were allowed to give you prices 5x narrower than today, i.e. making 5-cent markets in ES... there is already a precedent every hedger should be familiar with - ES calendar spreads - they trade with those tiny 2.5-dollar spreads. And for spread traders, where individual legs carry unplanned directional risk, internalization would also reduce major source of risk - failed execution of one of the legs.

*0.125 (ES daytrading cost per year) = 0.25 (ES b/a spread) * 2 (trades per day) * 250 (days per year) / 1000 (rounded ES price)