IB uses/supports native pegged order types on ISLAND, and as per https://www.interactivebrokers.com/en/index.php?f=commission&p=stocks2, the higher API commissions do not apply to native pegged order types: see footnote "4. This charge does not apply to relative, pegged to market and pegged to midpoint orders."
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IB directed orders and conflict of interest
- Thread starter adamant
- Start date
IB uses/supports native pegged order types on ISLAND, and as per https://www.interactivebrokers.com/en/index.php?f=commission&p=stocks2, the higher API commissions do not apply to native pegged order types: see footnote "4. This charge does not apply to relative, pegged to market and pegged to midpoint orders."
It would be really great to have en exception for OPG orders as well. I quite often find it useful to direct an opening order to a specific exchange for auction. However in many cases the huge API direction fee makes the trades unprofitable, hence my system does not take them.
Why do interactive brokers charge more for directed orders? Not just a little more, but *double* the commission, and no exchange rebates available.
It is clearly less work for them to simply send an order straight through to an exchange, rather than processing it themselves.
Therefore there *has* to be a profit motive for IB in effectively forcing clients to use SMART. This is a fact.
There are two ways I can think of that they profit from SMART:
1) They can internalize order flow and cherry pick fills. I always used to think this was the reason, but as far as I remember IB vehemently deny that this is what they do (now at least).
2) A very helpful friend at an investment firm suggested a different reason. Exchanges offer discounts for submitting a batch of orders in large volume. Apparently above a certain volume threshold on certain exchange charges may be wavied entirely on additional lots. This would mean that IB would profit from grouping client orders together and submitting them in one batch. The upshot of this is that the longer IB delays your order, the more other client orders it will be grouped with, and the less IB will pay. I don't need to tell anyone how meaningful microseconds let alone tens or hunderds of milliseconds in today's markets, and what a clear opposition to client interests delaying orders represents.
I have been running automated strategies for a while now with IB and I have a server hosted in New Jersey 2 milliseconds from them, but I am much less than happy with the way SMART has been behaving.
Does anyone have any further light to shed on this? Perhaps someone from IB enlighten me as to which of the above are true, or another reason I haven't thought of, for why simpler directed orders cost more than double SMART orders?
This is IB's Disclosure of its Order Routing Procedure and Payment for Order Flow:
https://gdcdyn.interactivebrokers.c...rmSampleView?ad=order_routing_disclosure.html
This document does, in many ways confirms your suspicion and observation. IB does NOT sell customers' order flows for money but it DOES receive payments in compensation if it routes customers' orders to certain liquidity providers on its so called ATS that is supposed to provide faster execution and/or better price so the end result is the same that IB has a direct incentive to route your orders in a way that it receives more payments for the orders. And that's probably why they are pushing so hard for everybody to use Smart Routing because under Smart Routing, it can route your orders as it pleases for it to earn those commissions but if you route your directly to a certain exchanges then IB loses that control so it raises the price of the commission and swallows all of any rebates. For tiered commission structure, it states very clearly that "it may receive enhanced rebate payments for exceeding volume threshold on certain markets but typically will not pass these enhancements to customers". It's very clear.
And especially for Options, IB even has its subsidiary Timber Hill as "a significant market maker on many options exchanges" and it actually pays IB any allocation of payment for orders and IB routes orders to Timber Hill first bypassing the exchanges but only when it's offering better price than other exchanges and Timber Hills earns a market-making spread. To me, that's very clear violation of conflict of interest where the broker is taking the other side of the customers' transaction and is trading against the client when all orders are supposed to be traded on an central exchanges. Otherwise how do we know that we are really getting the best price when Timber Hill essentially IB can be earning spreads at our expense?
I am beginning to think that the SMART, while it seems cheap, is actually costing many users more than they would be paying using directed orders in failing to hit exchanges, loss of queue position in the order book, and limit orders mysteriously executing as market orders with no rebate.
Oh yes if you read the disclosure statement that I posted in my previous post:
https://gdcdyn.interactivebrokers.c...rmSampleView?ad=order_routing_disclosure.html
It states very clearly there that IB will convert your otherwise non-marketable orders to ISO, Intermarket Sweep Orders in order to get you a faster fill when you use Smart Routing and what that essentially does that your otherwise liquidity-adding limit orders would all of sudden become liquidity-taking market orders because it's hitting all of the exchanges all at once and taking out all orders sitting on the books regardless of the quantities there. So you will see that even when your order was executed at worse than NBBO which is IB's criteria for liquidity-adding on certain exchanges, you will actually be charged liquidity-removing commissions. It's great you got a fast fill but if you were looking to receive rebates, you are out of luck. And you don't have a choice, as long as you choose to use Smart Routing even if you specify to receive rebates, IB reserves the right to convert your order to ISO and there is no way for you to refuse this.
I find IB does this more to larger orders because I suspect that on smaller orders, IB doesn't really doesn't care to share couple of dollars of rebates with its customers but on large orders, it tries to earn back all of the rebates that it paid out. So I agree with you that even though Smart routing is advertised to be supposedly cheaper and reduces cost for customers but in reality it's actually more expensive for customers because you have no way of controlling where or how you want to send your order to achieve what you want and instead you are at complete mercy of a "black box" of an order routing system that you have no idea about and you are stuck with whatever commission that it dumps on you.