FINRA trades and Interactive Brokers

[rbartell]

Interactive Brokers has a nice feature now where you can look at the time and Sales and if you hover over a trade, you can see the exchange it was made on.
I noticed many trades that were occurring at my level (bid or ask), but I was not getting filled. I contacted IB, and they said that they don't participate in the FINRA trades (not an exact quote, but something to that extent). Well, in some of the securities I'm looking at, well over half the trades are FINRA. I haven't looked into the details, but is this some sort of association where you have to pay $100,000 grand to have the privilege to buy or sell at the "real" bid/ask. Does anyone have info on who has access to these markets (any brokers?) and any other info on how to get into the club?

 

[rmorse]

I did not know of this until your post. I read quickly though this: http://www.finra.org/Industry/Regulation/Guidance/p038942#100

I "think" these are crossed transactions by FINRA members. If that is true, you never had access to this flow. Can you provide an example of what symbol you viewed this on and what exchange your order was routed to?

 

[Occam]

What they probably mean is the FINRA TRF, which is where most internalized trades and dark pool trades are reported.

Whether or not you can participate depends on where/how these trade originated:

Broker/dealer internalization: There's probably no way for you to participate in the biggest slice of FINRA TRF volume, which is order flow internalized or sold to wholesalers by the client's broker. Effectively it means certain big participants get to jump in front of your bid/offer in exchange for a small payment to the originating broker, making the market a mess for everyone else and costing the investing public dearly, in aggregate.

http://www.nanex.net/aqck2/3519.html

Dark pool volume: you may be able to interact with this order flow, if your broker provides you access to the pool in question, although there are no guarantees, as no one probably really knows what goes on inside these pools except the guys who coded them, and banks that own them have been known to do some very strange things within them, e.g. giving "special advantages" to certain participants, some of which may even be subsidiaries of the owners of the dark pool itself.

Interactive Brokers has a nice feature now where you can look at the time and Sales and if you hover over a trade, you can see the exchange it was made on.
I noticed many trades that were occurring at my level (bid or ask), but I was not getting filled. I contacted IB, and they said that they don't participate in the FINRA trades (not an exact quote, but something to that extent). Well, in some of the securities I'm looking at, well over half the trades are FINRA. I haven't looked into the details, but is this some sort of association where you have to pay $100,000 grand to have the privilege to buy or sell at the "real" bid/ask. Does anyone have info on who has access to these markets (any brokers?) and any other info on how to get into the club?

 

[rbartell]

I did not know of this until your post. I read quickly though this: http://www.finra.org/Industry/Regulation/Guidance/p038942#100

I "think" these are crossed transactions by FINRA members. If that is true, you never had access to this flow. Can you provide an example of what symbol you viewed this on and what exchange your order was routed to?

A good example of this is TFI, where over half of the trades are FINRA. My order is entered via IBs SMART, so not sure where the trades are ending up, probably ARCA.

 

[rmorse]

With equity orders on TWS smart route, you can see where your order goes by looking at the "Pending Orders" under "destination."

 

[rbartell]

Effectively it means certain big participants get to jump in front of your bid/offer in exchange for a small payment to the originating broker, making the market a mess for everyone else and costing the investing public dearly, in aggregate.

Thanks for the info.
I've been looking at these trades for a few months now, and there is basically an algorithm that front runs any order that is trading in a stock with a spread above a certain level.
Generally, if I'm putting a bid order out there at 50.00 there will be FINRA trades at 50.0001. Anyone selling into that bid gets $50,000.10 instead of $50,000. Then if I happen to buy and want to sell, I need to sell right back into their algorithm, in an illiquid market because nobody bothers to participate in a market where any chance of profit gets front-run.

 

[rmorse]

This is all from Payment for order flow. Nothing you can do about it.

 

[Occam]

I get the full feed of US equity trades, and looking at yesterday's TFI trades, I can see that much of the volume of TFI is sub-penny (e.g., trades at $24.0799, when the best ask was $24.08). This is an obvious sign of B/D internalization and/or sale of order flow to wholesalers -- they tack on a trivial "price improvement" of $.0001, cutting in front of the $24.08 ask, then can potentially turn around and sell into a midpoint order for a virtually instant 50x profit, etc. For better or for worse, this line-cutting "privilege" is only available to a handful large trading companies.

Regarding where IB sends your orders, IB's smart router can route you to Timber Hill, IB's own market-making "affiliate" (this is known as Broker/Dealer Internalization.) https://www.interactivebrokers.com/en/?f=%2Fen%2Fgeneral%2Feducation%2Ffaqs%2FtimberhillAutoExeService.php If you want to send your order to a particular exchange, then you need to "direct" it optimally, which can be a tricky job in itself. Unfortunately, there are no easy answers here, as brokers which either internalize or sell their order flow have a potential conflict of interest, and this includes the lion's share (if not all) of the discount retail brokers in existence today.

A good example of this is TFI, where over half of the trades are FINRA. My order is entered via IBs SMART, so not sure where the trades are ending up, probably ARCA.

 

[rbartell]

I get the full feed of US equity trades, and looking at yesterday's TFI trades, I can see that much of the volume of TFI is sub-penny (e.g., trades at $24.0799, when the best ask was $24.08). This is an obvious sign of B/D internalization and/or sale of order flow to wholesalers -- they tack on a trivial "price improvement" of $.0001, cutting in front of the $24.08 ask, then can potentially turn around and sell into a midpoint order for a virtually instant 50x profit, etc. For better or for worse, this line-cutting "privilege" is only available to a handful large trading companies.

It's pretty easy to see where this is going. No one is going to make a market when there are a few players front-running any legitimate bid/offer. The "privileged" members you mention have an incentive to make bids/offers even wider for fatter profits. I'm shocked FINRA could be involved because their page says they're "authorized by Congress to protect America’s investors by making sure the securities industry operates fairly and honestly", and their website makes it look like you can count on them like they are close friends and family.