Quote from WinstonTJ:
Again, I'm not sure what your point is. I agree that there are very few self-clearing brokers left - there is also very little money in that line of business. Most brokers (self-clearing or not) give you a CHOICE of DMA or a proprietary routing system. I fail to see why that is an issue. If your favorite "exclusive DMA broker" added a dark pool to it's choices couldn't you just choose not to use it??
First, you seem angry at Penson for some reason - Penson isn't even technically in business so you are moaning and groaning about a failed, defunct business which had bad business models/practices since they were not financially sustainable. I have no idea what your issue with Penson is but it is no longer so I'd get over them.
Second, how do you know that you get ripped off if they internalize or sell their order flow? I am personally not a huge fan of internalization or selling order flow - but in their defense they are required to give you price improvement so you do end up getting a better deal than you would have had you gone to the exchange directly. So how do you know you are getting ripped off? Have you gotten ripped off and if so would you share that?
Third, yes I agree that you are limited to Penson's capabilities. Since it is no longer it has very few capabilities. You will always be limited to your broker's suite of services they offer - no matter who you trade through. Although some brokers have better short-lists than others, you do sometimes have a choice to go out and borrow on your own from an independent 3rd party stock loan service... So again, you have choices.
Your last point is stating the obvious. If your clearing agent goes out of business then yes, I agree with you... your executing broker is going to have issues.
Again, I don't know what your issue is with Penson but the whole industry is getting squeezed right now. There is little money in being a self-clearing broker dealer so if that is your gripe I would start complaining about regulations and regulators because very few people on Wall Street are in business to lose money.
To be fair 'brokers' that clear through Penson, aren't true brokers in the sense that they are Introducing Brokers and your actual broker happens to be Penson. Penson sets the fixed cost-per-share basis for every transaction, the Introducing Broker must place their price on top of that.
With Penson they openly state that orders that are not directly routed to ECNs/Exchanges are sent to their friends at Knight, Citadel, et. al.
So, you don't get the best price, you get last priority as a part of the monopoly order flow of the HFT market-maker that owns your order. The HFT firm will tell the authorities that the order flow received the best pricing relative to fellow hft market-makers, but that's about it. The truth is that your order execution is made subordinate to other orders. That is the rip.
There is a significant difference between executing against captive order flow directly in a dark pool, and being part of the dark pool's monopoly order flow. You don't get priority and your orders will be passed not only for Knight's own orders, but also for traders that directly execute against Knight's order flows.
You may think that you're getting a deal at $9 a trade, but in reality you're paying for that it increments in terms of getting poor fills over time. HFT firms are using your liquidity to leverage their own trading pool, you don't benefit from that liquidity financially, penson and your IB do.
This also means that the rate that your IB provides will ultimately be based on what Penson sets in terms of Penson's DMA offerings as well. Right now, Lightspeed is offering .0045 per share not including exchange fees, however if Penson/peak6/apex went bankrupt, and they switched to another broker/dealer they would be subject to the new pricing model set by Southwest Securities, Wedbush, or Knight or whoever else.
When brokers route their orders as part of order flow to ubs, or Knight or whomever, this gives ubs or Knight a captive order flow to execute against. The set a flash trade, skim the profit and give a kickback to the IB and to the Broker.
This is different from a broker that has an actual Direct-Market-Access model. In other words, with Lightspeed even if Lightspeed does not sell order flow for non-directed trades, the orders will end up going to Penson and Penson will sell whatever just the same.
Whereas with a self-clearing firm that does not sell order-flow like IB, Tradestation or Vision, their business is to give you the best pricing possible even with their proprietary order management systems, the difference is that they will profit from liquidity rebates and not you, but they will still give you the better execution price as your orders by nature are not being sold and traded against by counter-parties. They don't profit on the spread, they profit on the commissions only.
No counter-parties=lower effective cost for the client/end-user. I don't see how you can argue otherwise, unless you're an institutional prime brokerage client at GS or another BB and don't mind GS front-running you in exchange for the margin they provide. That's a 'fairer' trade-off, but as a retail client, you don't get anything..
And how are those broker/dealers, IBs and HFT market-making firms making a profit? Through the use of front-running/flash-trading. Just because a firm is self-clearing is not enough. Look at Etrade, they sell their order flow anyway, so orders that are going to go through that retail broker is going to be held captive by Institutional Traders to improve their liquidity, not yours. Also taking a look at the pricing structure for Lightspeed, it is still very expensive compared to what Institutions pay. Why? Because Lightspeed sets its commissions per share above the rate that penson mandates. This means that there are limits to the extent that organizations such as Lightspeed can have in terms of flexible pricing for its products. They are basically skimming the difference, and for what? For the lowest-quality broker-dealer possible. A Broker-Dealer (Penson) that makes most of its profits from selling order-flow. So even if Lightspeed has success, this is actually ironically bad for the integrity of Penson's order-flow based business. This will weaken the actual business of Penson, I don't see how this is a sustainable business model.
Brokers that sell order-flow are basically the modern limited variants of bucket-shops in the equity space. Believe me, if the regulations were more relaxed they would be proper bucket-shops similar to how FXCM/Gain is in forex. That's not to say that you can't profit from a bucket-shop, but if you don't realize that you're getting ripped off, you need a reality check. Though of course, there are some brokers that will rip you off less than others and provide you with better fills based on the spread (E.G. IB will give you better fills through their smartrouter than a typical penson based broker using their smart router, and that penson based broker may give you better fills than say Scottrade, etc.). Everything is relative.
Most likely after the Peak6 venture fails, Knight, Citadel or UBS, etc. will buy-out penson to capitalize on that liquidity.
