Quote from zdreg:"the whole market structure is changing so what applied and held true even a year ago is very much different today.
would you please explain the differences and its effect on the trader?
The big banks have gotten out of the prop trading business. This makes things very complicated. A few of the bigger HFT players initially stepped up while other smaller HFT shops sprouted but the bottom line is we have diversity now and many more players than before.
Before, when the bank's employees were either running algos or sponsoring hedge funds & prop traders that ran HFT algos they would essentially waive clearing costs (or the banks would let their traders trade for free... or just about free). While this was happening the banks would pay for order flow just like anyone else but it was much more consolidated. There were far fewer players in the game and the big banks controlled most all of the HFT and received most all of the order flow.
What that did was push HFT guys (and girls) over to the big banks rather than start their own funds or firms. Because the banks allowed the HFT traders to trade for free the outside clearing firms (like a Penson for example) were charging normal rates for traders either manually trading or automated trading but nothing fast or big or fancy. Yes there were a few uber-HFT guys clearing through retail or independent clearing firms but the vast majority of it was controlled and endorsed by the big banks.
As the banks abandoned proprietary trading there were hundreds of spin-off small firms that started up - and they went out to clearing firms other than the banks because they weren't in that business anymore (or the banks had sold that part of their business to other 3rd party clearing firms). As that happened the traders drove rates down and started clearing and rate wars between whatever clearing firms and execution firms were left that would take their business.
We all know how sustainable that was... Many firms that used to clear are no longer in that business - or clearing firms have needed to re-capitalize. For the manual trader paying a penny a share this wasn't even on your radar but for the people out there clearing 3-5 million (or more) shares a day it has been a roller coaster ride the last few years.
Hope that's the color you were looking for. Also don't forget that flash trading or flash orders have stopped as well. Things are different.
Quote from schulzey:I'm very confused. I don't know much about HFT as I'm just a retail trader but this thread seemed interesting so I thought I would give it a read.
WinstonTJ was winning the debate in my opinion until I saw his previous posts that seemed to completely contradict what he is saying now.
That being said, I don't care if a broker makes an extra fraction of a cent off of me for giving me $1-3 trades. Just my 2 cents.
I don't agree with internalization but at present it is a necessary evil. In the past you still had a choice where to send your order but the fees made it very cost prohibitive to direct your orders to an exchange. This is still true however a few things have changed. When a retail broker used to internalize your order they went through a few steps: (use "retail trade" as an example... could be IB, etrade, scottrade, etc.)
#1 - retailtrade would decide internally they want your order, if they want it they would cross the order and it would be filled.
#2 - if they didn't want your order they would hold your order (for an unknown amount of time) and flash or give others a sneak peak at your order allowing others to also decide if they want your order or not. (meaning retailtrade would sit on your order while they flashed it to others like citidel, knight, getco, etc.)
#3 - retailtrade would either ship your order out to one of their partners who was paying for the flash orders and/or order flow or a certain amount of time would expire and they would be forced to act upon the trade.
#4 - retailtrade would then take one final look at your order and decide if they want to take the other side of it or let it go off to the exchange.
This was prior to flash orders being banned/stopped and during that time internalized orders were taking a very long time to execute and many people had the chance to look at your order and decided to execute or pass on it. These days your orders are either crossed immediately or they are sold to any number of firms who pay for order flow.
I still generally disagree with internalization and feel that the market (at least the equity market) would be healthier if each market participant's orders were sent directly to the exchanges - but just like how HFT beat up on the clearing firms over rates... the retail traders also beat up on their brokers over cheap rates. There is so much overhead involved with owning and operating a retail brokerage firm (compliance, legal, marketing, real estate, etc) that the money needs to come from somewhere. Think about the difference in ticket charges between an "auto" routed trade and a directed trade (sent to NYSE or NASDAQ directly). In a lot of retail shops the price is double (for example $9.99 vs. 19.99). Even still the internalization and selling order flow is offsetting the very few traders that direct their orders. If internalization was banned and the rest of the structure stayed the same we would see the end of the discount broker and go back to the days of $50 trade/transaction charges.
It's just a fact of life. Again, I don't agree with it but I know a lot of guys that work for a few firms that internalize orders and just hearing the changes that they have implemented over the past year makes me feel better. I would much rather see a world where the discount broker charges rates equivalent of a prop firm and internalization goes away - but I doubt every retail trader in the world wants to go out and get their Series 7.
Enough typing for now. This guy mrbrettonwoods has no idea what he is talking about but I am happy to explain myself anytime to anyone.
