IB is a great broker, and I believe its Chairman is committed to quality order execution, but some IB employees are disserving the company by preventing consistent quality control in this area. This sometimes produces such poor executions, that at least one highly liquid product, the security IWM, has, in my experience, become untradeable using SMART. My hope, for this thread, is that other IB customers will join in and encourage these employees to make quality control a priority. My single voice matters little, but perhaps other customers will add their voices to mine.
I noticed, in late April and early May, an apparent deterioration in the speed and price achieved by IBâs SMART routing of marketable orders in the security IWM, the only security I was trading. IWM is one of the most liquid ETFs, tracks the same Russell index as the ER2 futures contract, and usually has a one-penny spread during regular trading hours. I noticed my orders were sometimes taking between several seconds and 40 seconds to execute, during which time the market could move against me by 5 to 15 cents. Could it be that perhaps my experience, with this particular security, was not representative of SMARTâs performance on other securities in general? I also mostly used marketable REL orders, so could it be that perhaps my experience was not representative of SMARTâs performance with other types of marketable orders?
One of the worst such executions took place after a Fed announcement on 3 May 2005. My order to close a long position, by selling 100 shares of IWM, via a marketable REL order placed at 2:17:25 pm EST, took 34 seconds to execute, during which time the market moved against me by 20 cents. I started with a REL offset of 1 cent, when the spread was only one penny, and increased this offset by 1 or 2 cents every second, to ensure the order was marketable. A 34 second delay was no longer extremely unusual for SMART trading of IWM, but because the market tends to move so rapidly after a Fed announcement, the cost of the delay (20 cents) was somewhat greater than usual for delays of similar duration (usually itâs less than 15 cents). The actual execution took place on Nasdaqâs Super-Intermarket, which is labelled âCAESâ by TWS. The market was bid 116.61, ask 116.62, when I first placed my order. Several hundred thousand shares executed over the next 34 seconds of delay, while the price trended down, down, down, and then, when my order finally executed at 2:17:59, on CAES, which showed the then best bid of 116.45, the price I got was 116.42, 3 cents below the CAES quoted bid. My IB-quotetracker data seems to indicate that the CAES bid did not decline, down to the price I got, until about ten seconds after my order was executed.
My IB-QT data seems to indicate that my order could have been immediately and automatically executed when it was first placed, and that this could have been done thru island, brut, caes, or arca, whichever one was at the NBBO, and that this would have yielded me a a price almost 20 cents better, and 34 seconds faster, than what I actually received. My IB-QT data shows that neither NYSE nor AMEX were at the best bid, so this was not a case of manual quotes and the trade-thru rule combining to block automatic execution. (The trade-thru rule sometimes temporarily blocks auto-execution venues from executing, until NYSE or AMEX stop displaying a quote better than the auto-ex venues). If the best bid had been on a regional exchange, to which IB lacks direct connectivity, then IB could have routed the order to that regional exchange, through either brut or arca, and gotten an immediate automatic execution.
I asked IB to explain. Their rep, at first, wrote me that the order was delayed because the best bid was on the third market (i.e., was displayed by a Nasdaq market maker). The rep seemed to say that IB was unable to execute directly against that best bid, or to trade-thru it elsewhere because of the trade-thru rule, and so my order was unavoidably delayed. He wrote, âwe are looking at ways to get around this.â I responded that this doesnât make any sense, because IB already has direct connectivity to Nasdaq, appearing as CAES on the TWS. Nasdaq and its website both assured me that NASDAQ provides immediate automatic execution of any third market (Nasdaq market makerâs) best quote (subject, of course, to restrictions like the trade-thru rule). So why couldnât IB simply route to Nasdaq and get an automatic execution, immediately after I placed my order?
(cont'd in next post)
I noticed, in late April and early May, an apparent deterioration in the speed and price achieved by IBâs SMART routing of marketable orders in the security IWM, the only security I was trading. IWM is one of the most liquid ETFs, tracks the same Russell index as the ER2 futures contract, and usually has a one-penny spread during regular trading hours. I noticed my orders were sometimes taking between several seconds and 40 seconds to execute, during which time the market could move against me by 5 to 15 cents. Could it be that perhaps my experience, with this particular security, was not representative of SMARTâs performance on other securities in general? I also mostly used marketable REL orders, so could it be that perhaps my experience was not representative of SMARTâs performance with other types of marketable orders?
One of the worst such executions took place after a Fed announcement on 3 May 2005. My order to close a long position, by selling 100 shares of IWM, via a marketable REL order placed at 2:17:25 pm EST, took 34 seconds to execute, during which time the market moved against me by 20 cents. I started with a REL offset of 1 cent, when the spread was only one penny, and increased this offset by 1 or 2 cents every second, to ensure the order was marketable. A 34 second delay was no longer extremely unusual for SMART trading of IWM, but because the market tends to move so rapidly after a Fed announcement, the cost of the delay (20 cents) was somewhat greater than usual for delays of similar duration (usually itâs less than 15 cents). The actual execution took place on Nasdaqâs Super-Intermarket, which is labelled âCAESâ by TWS. The market was bid 116.61, ask 116.62, when I first placed my order. Several hundred thousand shares executed over the next 34 seconds of delay, while the price trended down, down, down, and then, when my order finally executed at 2:17:59, on CAES, which showed the then best bid of 116.45, the price I got was 116.42, 3 cents below the CAES quoted bid. My IB-quotetracker data seems to indicate that the CAES bid did not decline, down to the price I got, until about ten seconds after my order was executed.
My IB-QT data seems to indicate that my order could have been immediately and automatically executed when it was first placed, and that this could have been done thru island, brut, caes, or arca, whichever one was at the NBBO, and that this would have yielded me a a price almost 20 cents better, and 34 seconds faster, than what I actually received. My IB-QT data shows that neither NYSE nor AMEX were at the best bid, so this was not a case of manual quotes and the trade-thru rule combining to block automatic execution. (The trade-thru rule sometimes temporarily blocks auto-execution venues from executing, until NYSE or AMEX stop displaying a quote better than the auto-ex venues). If the best bid had been on a regional exchange, to which IB lacks direct connectivity, then IB could have routed the order to that regional exchange, through either brut or arca, and gotten an immediate automatic execution.
I asked IB to explain. Their rep, at first, wrote me that the order was delayed because the best bid was on the third market (i.e., was displayed by a Nasdaq market maker). The rep seemed to say that IB was unable to execute directly against that best bid, or to trade-thru it elsewhere because of the trade-thru rule, and so my order was unavoidably delayed. He wrote, âwe are looking at ways to get around this.â I responded that this doesnât make any sense, because IB already has direct connectivity to Nasdaq, appearing as CAES on the TWS. Nasdaq and its website both assured me that NASDAQ provides immediate automatic execution of any third market (Nasdaq market makerâs) best quote (subject, of course, to restrictions like the trade-thru rule). So why couldnât IB simply route to Nasdaq and get an automatic execution, immediately after I placed my order?
(cont'd in next post)
