Do you care about maker/taker fees?

Helene1717 · Oct 13, 2016

Hi,

I'm a researcher in finance and am interested in puzzling fee structures across exchanges. Having no experience in trading, I'm curious how in reality traders deal with the maker/taker fees. I have a purely imaginary hypothesis for informed traders' choice, and do let me know if you find it correct. Many thanks!

The hypotheses:
1. If there is very good depth at best offer in an inverted fee market (e.g. OMX or EDGA), you would take the liquidity there;
2. However, if you find your order size > the depth in inverted market, you'd avoid such a market because by going there you're revealing your information to market makers. Notice here I assume they are willing to pay for posting liquidity only because they are not waiting for info there.

BTW I've heard rumors about brokers chasing rebate and routing orders to some bad liquidity but good rebate exchanges. Any information on considerations of venue choice is welcomed! I'm eager to know more about the real-world

Thanks,
H

JackRab · Oct 13, 2016

I think it would depend on what your aim is...

Do you want to get the correct price, or the correct size? And even then, if your size is not there... than basically the price is not right.

It doesn't matter whether you're in a market with a maker/taker fee structure or not when you need to do a big size which isn't there. The market moves the same way, if you show large size on the bid... the offer price will move up/away... supply/demand.

Maker/taker fees you start to look at when at the same price and same order size you can trade one several markets. And then you ideally chose the one with less transaction costs.

But if you need to get a quick fill with the desired size, I would say to get that fill outweighs the costs based on fee structure...

Helene1717 · Oct 14, 2016

Thanks for the reply, JackRab! I agree with most of your reply, but didn't get the second point: consider a desperate informed trader placed an enormous market order, 1. if there is not enough depth: there would not be any indication of his order size since the order is partially filled; 2. if there is enough depth: he doesn't care about the price impact as he've got his demand fulfilled. I assume you're indicating limit order here?

Nevertheless, I wonder if certain exchange attracts more informative trades; the fee structure I mentioned above was just a hypothesis (e.g. some super tempting venues would attract most informed traders). If you have better stories on how exchange competes with each other to attract types of customers, I'm all ears!

Thanks again,
H

JackRab said:
I think it would depend on what your aim is...

Do you want to get the correct price, or the correct size? And even then, if your size is not there... than basically the price is not right.

It doesn't matter whether you're in a market with a maker/taker fee structure or not when you need to do a big size which isn't there. The market moves the same way, if you show large size on the bid... the offer price will move up/away... supply/demand.

Maker/taker fees you start to look at when at the same price and same order size you can trade one several markets. And then you ideally chose the one with less transaction costs.

But if you need to get a quick fill with the desired size, I would say to get that fill outweighs the costs based on fee structure...

d08 · Oct 14, 2016

If you want to provide liquidity but fear your size is too big then you split the order up. It's also a good idea when taking liquidity. Sending big size in one order is just asking for trouble unless you're trying to push the market one way.

Helene1717 · Oct 14, 2016

d08 said:
If you want to provide liquidity but fear your size is too big then you split the order up. It's also a good idea when taking liquidity. Sending big size in one order is just asking for trouble unless you're trying to push the market one way.

Thanks for the reply, d08!

Exactly - my question is, after splitting order over time, for execution of each piece, will you prefer certain exchange or rebate/fee reasons, or avoid one venue due to information leakage concerns? Thanks!

H

Occam · Oct 15, 2016

The answers to this question depend on the security type and country. For US equities, market microstructure is extremely complex; hence, so is the decision of routing. Throw into the mix the issue of broker/dealer internalization, dark pools, and order types (which supposedly number in the 10,000's per exchange, when considering the combinations of FIX tags you can send), and this type of decision is impossible to optimize completely. But your guesses are good -- everything you mention is indeed considered "in the real world".

Both retail and institutions also use routing algorithms designed by third parties. "Smart routing systems" designed by brokers/venues tend to favor the internalization venue that "just so happens" to be owned by that same broker/venue (or its parent). This is true even at the institutional level and unbeknownst to clients, as was demonstrated by the Pipeline and ITG scandals, and somewhat similarly by the Barclays dark pool scandal. All three of these cases involved of deception by brokers or venues with previously excellent reputations.

If you really want to study this at a "research level", then you might want to consider getting the historical consolidated quote (SIP) data and looking at it. If you do, then keep in mind that each reporting exchange/venue is using its own clock and these data are mostly out of order when considering very short timeframes; yet you can still probably make out pretty well what's happened in most cases.

Finally, you might be interested in this piece by Nanex, which details how the lion's share of undirected (unspecified venue) retail trades are handled:
http://www.nanex.net/aqck2/3519.html

Helene1717 · Oct 15, 2016

Occam said:
The answers to this question depend on the security type and country. For US equities, market microstructure is extremely complex; hence, so is the decision of routing. Throw into the mix the issue of broker/dealer internalization, dark pools, and order types (which supposedly number in the 10,000's per exchange, when considering the combinations of FIX tags you can send), and this type of decision is impossible to optimize completely. But your guesses are good -- everything you mention is indeed considered "in the real world".

Both retail and institutions also use routing algorithms designed by third parties. "Smart routing systems" designed by brokers/venues tend to favor the internalization venue that "just so happens" to be owned by that same broker/venue (or its parent). This is true even at the institutional level and unbeknownst to clients, as was demonstrated by the Pipeline and ITG scandals, and somewhat similarly by the Barclays dark pool scandal. All three of these cases involved of deception by brokers or venues with previously excellent reputations.

If you really want to study this at a "research level", then you might want to consider getting the historical consolidated quote (SIP) data and looking at it. If you do, then keep in mind that each reporting exchange/venue is using its own clock and these data are mostly out of order when considering very short timeframes; yet you can still probably make out pretty well what's happened in most cases.

Finally, you might be interested in this piece by Nanex, which details how the lion's share of undirected (unspecified venue) retail trades are handled:
http://www.nanex.net/aqck2/3519.html

Thank you for helpful elaboration, Occam!

Yes I'm only considering US equity market here. Thanks for bringing up the clock latency problem. I am using sip data, but it does not include any suggestion on latency of specific exchange. Nevertheless, I don't think it to be a severe flaw for sip data: except for trade-through all exchanges are required to be at the same NBBO, so they need to be reported to the consolidated tape before execution; thus the timestamp when a trade is printed should exactly be the same time it's executed.

I just went through the nanex piece, it relies on sub-penny (or discrete prices) and barely touch the information leakage possibility. That makes me more worried whether information concerns are plausible in reality...

Thanks,
H

d08 · Oct 15, 2016

Helene1717 said:
Thanks for the reply, d08!

Exactly - my question is, after splitting order over time, for execution of each piece, will you prefer certain exchange or rebate/fee reasons, or avoid one venue due to information leakage concerns? Thanks!

H

For me in US equity products, I prefer IEX (especially when taking liquidity) over others - others were IB's SMART which includes most other exchanges. This is because in a side by side comparison IEX's fills were considerably better. I don't really care about the fee differences because I'm not HFT and while I'm paying $4 more in fees, I save $50 on the better fill. I don't avoid any particular venue because all the pre-IEX venues are equally corrupt and as retail I get the worst treatment.

Helene1717 · Oct 15, 2016

d08 said:
For me in US equity products, I prefer IEX (especially when taking liquidity) over others - others were IB's SMART which includes most other exchanges. This is because in a side by side comparison IEX's fills were considerably better. I don't really care about the fee differences because I'm not HFT and while I'm paying $4 more in fees, I save $50 on the better fill. I don't avoid any particular venue because all the pre-IEX venues are equally corrupt and as retail I get the worst treatment.

Thanks for sharing your trading experience, d08! That's really helpful, I've always wondered about practical concerns of retailers.

In case you might be interested, with respect to this specific question, I'm also interested in how the SMART system of your choice, or in general institutional traders split orders across venues when trying to conceal their private information (As a side note, I refer to informed trader including institutional traders and bundled retail orders; I really doubt that exchanges are capable of screening traders' type and distinguishing brokers from principals).

Have a good weekend!
H

JackRab · Oct 16, 2016

Helene1717 said:
Thanks for the reply, JackRab! I agree with most of your reply, but didn't get the second point: consider a desperate informed trader placed an enormous market order, 1. if there is not enough depth: there would not be any indication of his order size since the order is partially filled; 2. if there is enough depth: he doesn't care about the price impact as he've got his demand fulfilled. I assume you're indicating limit order here?

Nevertheless, I wonder if certain exchange attracts more informative trades; the fee structure I mentioned above was just a hypothesis (e.g. some super tempting venues would attract most informed traders). If you have better stories on how exchange competes with each other to attract types of customers, I'm all ears!

Thanks again,
H

I was merely pointing to the fact that when a trader is under real pressure to fulfill an order quickly, he doesn't care about fee structure but more about getting the job done.

If you're a pro and you need to do a large size, you'll likely end up talking to a broker/dealer directly on the phone or Bloomberg messenger anyway... because your size probably is too big for on-screen quotes. So... you speak to a broker (and by broker I mean one that facilitates large sizes by matching pro's with pro's, not our everyday retail internet broker), and you will let him know what size you need to do. That's going to be matched off-screen. Ideally, he get's a sizable bid-ask market for you and then you tell him to buy the offer or sell the bid... or try to get a better bid or offer.

You can always find out the size, even of a market order where there's no depth. If I would market buy big size, the first offers will get lifted until there's none left. Then, someone will put in an offer... depending on market movement limits set by the exchanges... you likely trigger a price limit and the stock will (also depends on the exchange) go into an auction. That stock can re-open when the size of the market order is matched with an offer.... And if I would be the only trader giving that offer... I can find out the exact size.

So to keep your size a secret, you should spread out your order. Use several brokers and/or exchanges. Go to market at several times.

How exchanges compete with each other? That's with 2 things...
- Pricing structure, which one costs less to trade on. In that case you would always go with the least costly. That's also why some exchanges have incentives like the pay for providing liquidity. In that case, the 'aggressor', the liquidity taker basically pays the liquidity provider a fee.
- Total volume. There's no point to only trade on an exchange which has an illiquid market. Either less size in the orderbook or a worse bid/ask spread than another exchange. The exchange with the most volume usually is leading a often market makers on the other exchanges give quotes based on the bid/ask of the leading exchange. Just outside the leading spread and with slightly less size so they can hedge instantly.