Citadel, KCG and Robinhood

[d08]

The head of Citadel Execution Services, Nazarali, secured a seat last year on the SEC's new Equity Markets Structure Advisory Committee, where he has cast himself as a spokesperson for the interests of retail investors.

What a complete and utter joke.
That's like Pablo Escobar speaking on behalf of victims of the drug trade.

 

[AbbotAle]

Give me small bid-offer spreads + HFT over 1/8th or 1/4 bid-offers any day.

HFTs are just fast market makers. Market makers have always been a problem for traders/investors but they're part of the business.

Granted, I don't move a lot of stock but if it's such a problem for bigger traders, adapt or get out of the business because HFT isn't going anywhere.

 

[d08]

They're not really MMs, to my understanding they can pull bids any time they wish, MMs have an obligation to provide a market.

 

[1245]

YEs, MM are obligated to make two sided markets, but not on the NBBO. They can be outside.

 

[InfoTech]

Give me small bid-offer spreads + HFT over 1/8th or 1/4 bid-offers any day.

HFTs are just fast market makers. Market makers have always been a problem for traders/investors but they're part of the business.

Granted, I don't move a lot of stock but if it's such a problem for bigger traders, adapt or get out of the business because HFT isn't going anywhere.

Citadel and KCG are not being investigated for conducting HFT or MM operations. They are being investigated for using those operations to execute profitably against client orders in a way that may deprive their clients of best execution.

KCG's 606 report reveals that essentially all market and limit orders are routed internally to "KCG Principal" or "KCG Riskless Principal."

https://www.kcg.com/uploads/documents/Rule_606_Q1_2016.pdf

By the way, can anyone locate Citadel's 606 reports? They used to be available on the Citadel website.

 

[Metamega]

Themis wrote an excellent article on these "free" brokerages in January already (spoiler alert: they're not really free):

http://blog.themistrading.com/2016/01/robin-hood-the-legend-of-internalization/

Interesting article. The Ustocktrade one has me thinking how that's even legal. Read the disclaimer about how the super user is their parent company and from what I read says they don't have to take the trades as they see fit. So reading that image I posted from their site, it could fool you into thinking your getting the NBBO. It says at time of transaction, meaning they could hold that trade until their super user wants to take the trade. That's how I'm interpreting it, never tried them or know anyone so I could be way off.

I just have no idea how regulation would allow this.... Must have a great team of lawyers to figure this business model out.

 

[InfoTech]

Market orders should be made illegal which would remove the incentive to pay for order flow and would result in more buyers and sellers interacting between the spread (on average) with each producing increased yields on their transactions over time as neither will be subject to the dealer intermediation.

It's interesting to note that the SEC's Equity Market Structure Advisory Committee (which includes the head of Citadel Execution Services as a member) is considering a recommendation that market orders without price protection be banned.

From a memo issued this year:

"Another approach would be to place restrictions on the use of these order types. For example, as the risks posed by market orders stem from the lack of price protection, one possible approach would be for broker-dealers and exchanges to require that all retail-investor orders, including stop orders, include a limit price."

In the same memo, it is acknowledged that nearly all market orders are internalized or sold to market-makers rather than routed to exchanges to execute against displayed liquidity:

"It should be noted that almost none of the marketable orders (i.e., market orders or marketable limit orders) placed by retail investors are routed to an exchange for execution. See Concept Release on Equity Market Structure, Securities Exchange Act Release No. 61358 (Jan. 14, 2010), 75 FR 3594, 3602 (Jan. 21, 2010) (“Market Structure Concept Release”), available at https://www.sec.gov/rules/concept/2010/34-61358.pdf. Instead, these orders are internalized by the customer’s broker or sold to an OTC market maker that executes the orders against its inventory. Id. Internalization is believed to account for almost 100% of all retail marketable order flow."

 

[OneChicago]

"It should be noted that almost none of the marketable orders (i.e., market orders or marketable limit orders) placed by retail investors are routed to an exchange for execution. See Concept Release on Equity Market Structure, Securities Exchange Act Release No. 61358 (Jan. 14, 2010), 75 FR 3594, 3602 (Jan. 21, 2010) (“Market Structure Concept Release”), available at https://www.sec.gov/rules/concept/2010/34-61358.pdf. Instead, these orders are internalized by the customer’s broker or sold to an OTC market maker that executes the orders against its inventory. Id. Internalization is believed to account for almost 100% of all retail marketable order flow."

This is because customers have been conditioned to use market orders. These go back to the days when the market participants were separated and the amount of time it took to get an order to an execution made it difficult to know what the market would be then. That is no longer the case and the need for market orders is long gone for customers but they are critical for the consolidators as it allows them to earn the spread. SEC has some blame here. When they put REG NMS (1998) into effect the focus was on giving the customer a fill at the NBBO. They thought, reasonably, that if spreads tightened and the customers benefited all was well. The problem is that getting the offer for buyers and the best bid for sellers still means the customers using market orders are giving up the spread to the market making firms.

Like I have said, market orders should be banned entirely. They are not allowed at OneChicago.

 

[InfoTech]

market orders should be banned entirely. They are not allowed at OneChicago.

Good policy.

But what happens when a customer uses their broker's platform to submit a market order for a SSF? Does the broker add a limit before it routes to you, or is the order rejected by the broker prior to routing?

 

[OneChicago]

Good policy.

But what happens when a customer uses their broker's platform to submit a market order for a SSF? Does the broker add a limit before it routes to you, or is the order rejected by the broker prior to routing?

We reject any inbound message that does not have a limit attached. Firms vary in the way they require their customers to enter the order. Some translate into marketable limit orders on behalf of their customers.