Quote from Don Bright:
I'm curious, is that "all in" - no ECN's
Don,
I realize that you are a big fan of the all-in commission structure, and have a vested interest in this structure since that's how Bright Trading operates. Personally, I would strongly avoid any broker that offered an all-in rate, since this sort of rate assures that I will be paying a higher rate than I might otherwise pay.
I'll give an example to clarify. Let's consider two traders that exclusively trade Nasdaq stocks and trade equal monthly trading volume. The first trader removes liquidity on every entry and exit, incurring an ECN charge of 0.3 cents per share on every transaction. The second trader adds liquidity on every entry and exit, generating an ECN rebate of 0.2 cents per share executed.
Assuming that the brokerage firm needs a return of 0.3 cents per share to comfortably cover overheads/etc, they will charge these traders 0.6 cents per share minimum, to ensure sufficient profits assuming the worst case scenario that the traders are removing liquidity on every order. In actuality, the brokerage firm will earn 0.3 cps (0.6 cps commission minus 0.3 cps ECN fee covered by the all-in rate) from the first trader and will earn 0.8 cps (0.6 cps commission plus 0.2 cps rebate from the ECN) from the second trader.
As a result of the ECN add/remove liquidity considerations, the trader using a trading style that tends to ADD liquidity will be charged an excessive rate, and the brokerage firm will receive an excessive profit. This is all a byproduct of the all-in commission structure.
For me, I don't want my brokerage firm concerned with ECN fees/rebates. I will gladly pay the fees and pocket the rebates. Instead, I want them to provide the best possible rate, which is very easy for them to do once their largest variable cost (ECN fees/rebates) are removed from the equation.
I know of one trader that, on average, gets paid for every order executed. This is because he almost exclusively adds liquidity, and the ECN rebate is higher than his cents per share commission rate. You would certainly never get a deal like this from any "all-in" brokerage firm (negative commissions). However, in this case, the trader is extremely happy, and the trader's broker is happily making a profit on every trade executed.
To me, the "all-in" commission rate is more or less midway between a retail fixed per ticket commission structure, and a true cents per share model, with full pass through of incurred fees/rebates. I suspect that the all-in commission structure will be a thing of the past in another 2-3 years, as it is simply an inefficient model to set a fair cost to the trader, since the largest cost of all (ECN fees/rebates) is unknown to the broker when setting the rate.
I'm sure brokers will respond that they evaluate a clients fee/credits and may have to adjust commission rates later if the ECN fees are not what they were expected. However, I suspect that it would be extremely rare indeed for a broker to LOWER the rate (unrequested) because the trader was generating substantial rebates for the benefit of the firm.
Just my two cents... "All in" rates (or the firms that offer them) will be gone in the future. And hopefully, this clarifies for newbie traders that "all in" may have a nice sound to it, but it's actually a bad thing for the trader.
-Eric
