Direct Access Brokers that will not sell your Order Flow to HFT

[Occam]

Quote from WinstonTJ:

It was YOUR CHOICE to route your order that way. There is no recourse because YOU CHOSE the "no recourse" option when you submitted an order like that.

Again, if you don't like it then why are you sending your orders to internalization crossing engines?

I had no choice -- it was in an IRA account that offers no DMA. And most other retail (non-trader) accounts have little to no choice in the matter. It's easy to see in the 606 reports for Ameritrade, E-Trade, Fidelity, etc.

If you are for putting brokers out of business then how would you trade? You have to pay to play and you either need the capital to get over that hurdle or survive in the retail world until you can break free of it. I am generally against internalization but what you are saying makes no sense. If your broker needs that internalization income to stay alive then how would you trade if they went out of business? Do you have more capital you can just deposit into another firm's account? Or... what is your average trade's profit? Are you saying that you can stomach $20 ticket fees, $20 in and $20 out = $40 per trade... can you trade like that?

I never even remotely suggested I was in favor of putting brokers out of business. In fact, the brokers to which I send most volume don't internalize at all, yet still profit. Such brokers, to be sure, are not available to most retail clients, but I think it's a much more honest and transparent model that can easily be replicated.

If using a typical mass-market retail account, I would much rather pay $12 per trade than $10 per trade plus $20 per trade (on average) in hidden costs. Just because it's hidden cost doesn't mean it's not there.

So you think every time Congress gets involved with something things will magically get better? How did that work with housing and home ownership? I agree with you that something needs to change but saying "congress needs to get involved" is an ignorant statement - follow the money... They are paying lobbyists and doing everything they can to make a good thing last for as long as it can. If you want Congress to get involved you either need to re-elect a decent Congress or bait them with something else they think will be "better" (or more profitable).

I don't maintain that involving Congress would necessarily make things better -- Congress is getting involved, and indeed their intervention could make things worse, which I think is in part demonstrated by their receiving testimony from Knight, one of the biggest actors in the payment-for-order-flow space (again, look at a few 606 reports). But Congress can also make things better -- a lot of the opening up of markets to outside competition was in part due to the work of Congress going back to the 1970's.

Yes, Congress often gets things wrong, but there's nothing to guarantee that they have to. As imperfect a solution as it is, even the SEC's proposed "trade at" rule would be a much better alternative to the current situation of pfof/internalization running wild, in my opinion.

 

[WinstonTJ]

Your nonsense was such nonsense that it needed to be handled in two reply posts. I've spent too much time in this thread....

Quote from MRBRETTONWOODS: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.

I agree

Quote from MRBRETTONWOODS: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.

(no idea why this is bold but I typed too long to risk losing it) So does everyone else - E*Trade, Interactive Brokers, Scottrade, etc. the list goes on & on... (almost) EVERYONE in the retail game internalizes orders that the trader submits as "Auto" or "Smart" routing.


-What's your point with this? Penson is out of business, how many times does that need to be said to you so that you understand it... Penson used to do that... but today they are no longer so Penson does nothing.

Quote from MRBRETTONWOODS: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.

How do you get last priority? Do you now how the internet works? Packets? Networking? Various protocols? There are time stamps on these things and you receive fair and accurate pricing - unless you are CHOOSING to submit your order with conditions that allow your broker do do whatever they want with it. But again, I'm not sure how many times you need to hear this - but if you CHOOSE to send a directed order to an exchange with a set price then your order will be handled fairly. Your choice.

Please learn how the markets work before you start blindly pointing the finger.

Quote from MRBRETTONWOODS: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 are saying the same thing over and over - and I am responding the same way over and over. YOU WAIVE YOUR PRIORITY WHEN YOU "AUTO" OR "SMART" ROUTE YOUR ORDERS. That is your choice... If you don't like it don't do it. I don't agree 100% with how you state it - your descriptions are grossly generalized and not always perfectly accurate - but generally I agree that there is a difference between dark pool subscribers and the order flow that a dark pool may purchase.

Quote from MRBRETTONWOODS: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.

Penson is no longer so no... Penson no longer benefits from anything.

Quote from MRBRETTONWOODS: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.

First of all When I spoke to Lightspeed about a week ago I had to sign an NDA before they mentioned rates with me so you are either making numbers up, stating rumors or you are in violation of your NDA.

Second, we already agreed that an Introducing Broker (IB) sets rates ON TOP of the primary broker.

Third, for the 50-millionth time, PENSON DOES NOT EXIST ANYMORE so who cares...

Finally for this quote, we agreed in earlier posts that an Introducing Broker sets their rates on top (or in addition to) the primary broker. One would not have to make too large of an assumption to think that if any primary broker's rates changed that the Introducing Broker's rates would need to change accordingly.

Quote from MRBRETTONWOODS: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.

When you pay for order flow it is not called a kickback, it's called paying for order flow. Are there soft-dollar arrangements? Sure... Probably (I have no idea).

Quote from MRBRETTONWOODS: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.

Generally you are saying that you have an ax to grind against internalization, not any particular broker or front end or introducing broker. I've never used Litespeed so I have no idea if they even have a "smart" or "auto" routing function - but... IF THAT ORDER WAS SUBMITTED AS A DIRECTED ORDER THERE WOULD BE NO ISSUE. Again, this all comes down to a trader's choice. If a trader chooses to allow his/her orders to "just be taken care of" by their broker then that is their prerogative. Because you clearly have such an issue with that I would suggest that you direct all your orders.

Quote from MRBRETTONWOODS: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.

Holy run-on sentences batman...

Being self clearing or not has nothing to do with whether or not you sell order flow. You are confusing the two sides - execution vs. clearing. A self-clearing BD can sell order flow (or not) just as an executing only BD can.

As you say above, if you are a self clearing firm that does not sell order flow your business is to get your client's orders to whatever venue they want them to go to - and then to clear trades. I don't know what proprietary "order management systems" since your only goal is to direct the order exactly where the client/trader directed it. Do you know that many Market Making firms on the NYSE floor are not self-clearing yet they execute millions of shares (sometimes billions) a day?

You are way off base with the liquidity providing stuff. That stuff is generally break-even and is ALWAYS passed on to the trader. Entry level retail firms will bundle these fees (ECN fees as well as SEC fees) but that is incorporated into your commissions, nothing else. You are all over the map... Do they profit on the commission only or also on the liquidity?

 

[WinstonTJ]

Quote from MRBRETTONWOODS: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..

I'm speechless....

Quote from MRBRETTONWOODS: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.

I had to stop there. Your post started getting crazier and crazier and the massive run-on sentences are too hard to quote.

It is this easy - you can either direct your orders or allow your broker to handle your orders. If you choose to allow your broker to do what they choose with your order then yes, you are at their mercy but it was your choice.

 

[MRBRETTONWOODS]

Quote from WinstonTJ:

I'm speechless....

Well, what's absurd is the fashion in which you continue to justify market abuse against retail clients. That's just ridiculous.

The difference is that certain brokers will specifically only order-route to dark pools as a result of PFOF, irrespective of whether or not they can locate the best price at that pool. If they do not, then the IB for Penson will route the order to Penson and Penson will send it to Knight anyway. They call them dark pools for a reason. Limited Transparency.

Penson is now Apex, it is still alive and kicking, though under new management.

So, you accept that traders who route orders to dark pools directly may have advantages over typical retail traders whose orders are sold as order flow to those very same dark pools?

About Lightspeed, their cost-basis is limited to what Penson/Apex has to offer. Does this need to be repeated?

You have no idea? A century ago equity house bucket-shops were perfectly legal. Brokers like FXCM/Gain were available for the equity markets and in the bucket-shops, brokers would have access to better spreads than clients, whose very trades were at the mercy of the bucket-shop's counter-party positions.

What we have with dark pools now is the functional equivalent of a limited type of bucket-shop. Institutional Clients get fairer and better price improvement than retail clients for the very same orders.

If it is not a kickback, then where does the payment for order flow go? Not to the client, no. It doesn't simply disappear as it goes to the broker.

The brokers who are directing their orders to those very dark pools are not getting the NBBO, they are getting subordinate pricing to the owners of the dark pool and direct market participants. They will have their orders executed afterwards. Is that not front-running?

About run-on sentences, you have quite a few yourself, so let's leave the ad hominems aside, shall we? This is an informal forum, after all.

I am aware that self-clearing brokers can sell order flow as well, that's why I brought up the Esignal example, so I don't know what you are bringing that up for.

From an institutional standpoint, there's a difference between basic market-making and front-running monopoly order flow sent to your dark pool to improve your own liquidity as a market participant.

Yet the liquidity that the hft firms receive are more valuable than the cost of the commissions, are they not? Hence how they are able to provide incentives to broker-dealers and introducing brokers.

Again, I can go over your run-on sentences and your many grammatical errors in general as well, let's not go there.

You can argue that the pricing is profitable to the broker yes, but you cannot argue that it is beneficial to the retail trader whose fills are sub-par.

 

[bellman]

In summary, most retail traders are ignorant of the fact that they are losing fractions of a penny on average every time they use the "smart route" option. Thus, retail brokers are not incentivized to offer DMA at reasonable prices to retail accounts. This state of retail ignorance is likely to persist as evidenced by this thread.

 

[promagma]

What kind of delay are you guys seeing with non-directed routes, and with what broker?

From my experience the executions are snappy and you would need to analyze millisecond-precision data before claiming "it cost me $xyz".

 

[1245]

Quote from bellman:

In summary, most retail traders are ignorant of the fact that they are losing fractions of a penny on average every time they use the "smart route" option. Thus, retail brokers are not incentivized to offer DMA at reasonable prices to retail accounts. This state of retail ignorance is likely to persist as evidenced by this thread.

FYI. I know WinstonTJ. We are both the farthest thing from retail. I have 30 years in the business on all sides of the brokerage business. WinstonTJ has a more detailed knowledge than me of HFT and routes. If you're a retail trader entering small lots throughout the day, no one is jumping ahead of your orders. No one is stealing from you.

 

[WinstonTJ]

Quote from promagma:

What kind of delay are you guys seeing with non-directed routes, and with what broker?

From my experience the executions are snappy and you would need to analyze millisecond-precision data before claiming "it cost me $xyz".

I agree, the executions are usually excellent in terms of speed and price. It does depend on the type of order though. I don't ever use market orders so I don't know the rules but a market order can be held for a certain amount of time before it is acted upon... which happens no matter how you direct a market order.

The reason why retail order flow is worth so much is because a very high percentage of it is wrong - or on the losing side of the trade. Dark pools and HFT shops and whoever else like to use it as an out - but the order flow is only there because the retail trader placed his/her order in the first place.

 

[MRBRETTONWOODS]

Quote from WinstonTJ:

I agree, the executions are usually excellent in terms of speed and price. It does depend on the type of order though. I don't ever use market orders so I don't know the rules but a market order can be held for a certain amount of time before it is acted upon... which happens no matter how you direct a market order.

The reason why retail order flow is worth so much is because a very high percentage of it is wrong - or on the losing side of the trade. Dark pools and HFT shops and whoever else like to use it as an out - but the order flow is only there because the retail trader placed his/her order in the first place.

Well, look at what I found from Winston on another thread:

http://www.elitetrader.com/vb/printthread.php?threadid=199937

Quote from WinstonTJ:



What about arbitrage? Market making? Neither Arbitrage nor Market Making front runs anything. The thing that I find ironic is most people on ET hate on HFT (when they don't even understand what it is) while your retail broker internalizes order flow and royally F's you over on every fill.

There are several tiers in the HFT game and most would say what I do is HFT however the ONLY reason why I automate is because I can't manually trade all the strategies at once (one at a time no problem). People like 777 are trolls and have no purpose here. The HFT debate is over, everyone knows it exists, everyone understands the barrier to entry and everyone knows that computers are here to stay. That said - has anyone looked at the DECLINE in retail order flow to the exchanges since internalization began? HFT pulls money out of the market just like any other strategy does - but at least its within the direct access pool where people know that they are swimming with big fish. Even more funny than all of the above is that with direct access AND HFT you are still better off than getting F'd over by internalization.

Quote from WinstonTJ:



The fact of the matter is that 90% of traders use retail brokers and their orders never see the light of day. The retail firms set their price structures to make it cost prohibitive to send orders directly to the exchange. Because those trades never see the light of day, they aren't really impacted by what most on this board and in this thread consider to be "big bad HFT". The irony though, is that the retail guys are THE MOST impacted by HFT and you don't even know it or understand it.

Think of it as trading in two different universes - I never see your orders and you will never see mine. The HFT/Arb boxes out there that you guys complain about are in my world while the much more criminal HFT Internalziation boxes that I complain about are in yours.

What an outrageous display of hypocrisy.

 

[One]

My concern with pfof agreements and internalization is not with fractions of a penny, but execution quality, i.e., that they may compromise my chances of getting filled when selling on the offer or buying on the bid with limit orders, which can be very costly and particularly so with options. For example, I imagine most market makers paying for order flow, execute most, maybe not all, limit buy orders only when the market is offered at the limit price. I use smart routing regularly with immediately executable orders.

WTJ suggested several times to simply route directly if there are concerns, but the few times I have looked, I have not found that many brokers that seem to offer direct routing of say equity options. Is it the case that most brokers offer DMA and I have missed it?