Interactive Brokers - Receives Payment for Order Flow or Not?

[volpunter]

One always needs to be alert. The guy you linked to was stupid and naive and deserved his trouble. He was under capitalized. Then he over traded (16 calls on Google represents quite some notional). Then he was negligent in not following the close of the price at Friday close. He also did not instruct his broker how he wants to deal with the in the money option. He also did not read the contract he entered into with OCC and IB and finally he did not even seem to understand why he was liquidated. Outright stupid behavior in my book.

Even with long option positions you have to be alert.

Margin Call on an IB IRA account (Need Suggestions)

 

[def]

neither IB nor any of its representatives has taken the chance to demonstrate there are no conflict of interests with clients especially regarding their dark pool.

I almost guarantee you'll say I'm avoiding your question yet again but here goes:

Risk disclosure: Through its SmartRouting system, IB evaluates each individual order and determines the best execution venue(s), from the perspective of the customer, where that order may be executed.

IB site (in many places):
Best Price Execution
Most brokers trade against your orders or sell them to others to execute who will trade against them. The resulting poor execution probably costs you more than the commission you pay. IB SmartRoutingSM continuously searches and reroutes to the best available prices for stocks, options and combinations.

https://www.interactivebrokers.com/en/index.php?f=1685&ns=T

How many ways can we say that quality of execution is our driving force? I'm not going to say there are no conflicts of interests because that is a very very broad and silly question. You could argue every broker or service provider has a conflict of interest. On the brokerage end, they can sell your flow, charge outlandish interest rates, charge extra for exercise/assignment, mark up bank fees, etc etc. However, just because a firm can doesn't mean it does. I've provided links and disclosures saying IB doesn't sell your flow. I've provided links and disclosures (along with links to execution statistics) stating IB seeks to obtain best execution from the client perspective. IB's fees are also fully disclosed and transparent. I'm not going to get caught up in a play on words. I say one thing and there is always someone stating otherwise w/o any facts or data. Actions speak volumes. You don't trade US equities so you have Zero data to compare against yet you say you are worried about a conflict in interest. We say we provide best ex for our clients. You say prove it. I say we do each and every trade.

 

[volpunter]

Def, you gotta be joking with me(us), right? How are you not avoiding the question if in your reply the term "dark pool" does not even appear once when the question specifically asked about IB client orders and IB's dark pool? If you have no inclination to answer this question why all this circus and why can't you simply say that you refuse to answer?

I almost guarantee you'll say I'm avoiding your question yet again but here goes:

Risk disclosure: Through its SmartRouting system, IB evaluates each individual order and determines the best execution venue(s), from the perspective of the customer, where that order may be executed.

IB site (in many places):
Best Price Execution
Most brokers trade against your orders or sell them to others to execute who will trade against them. The resulting poor execution probably costs you more than the commission you pay. IB SmartRoutingSM continuously searches and reroutes to the best available prices for stocks, options and combinations.

https://www.interactivebrokers.com/en/index.php?f=1685&ns=T

How many ways can we say that quality of execution is our driving force? I'm not going to say there are no conflicts of interests because that is a very very broad and silly question. You could argue every broker or service provider has a conflict of interest. On the brokerage end, they can sell your flow, charge outlandish interest rates, charge extra for exercise/assignment, mark up bank fees, etc etc. However, just because a firm can doesn't mean it does. I've provided links and disclosures saying IB doesn't sell your flow. I've provided links and disclosures (along with links to execution statistics) stating IB seeks to obtain best execution from the client perspective. IB's fees are also fully disclosed and transparent. I'm not going to get caught up in a play on words. I say one thing and there is always someone stating otherwise w/o any facts or data. Actions speak volumes. You don't trade US equities so you have Zero data to compare against yet you say you are worried about a conflict in interest. We say we provide best ex for our clients. You say prove it. I say we do each and every trade.

 

[def]

Def, you gotta be joking with me(us), right? How are you not avoiding the question if in your reply the term "dark pool" does not even appear once when the question specifically asked about IB client orders and IB's dark pool? If you have no inclination to answer this question why all this circus and why can't you simply say that you refuse to answer?

huh?

6. Payment for Orders, Dark Pools, Liquidity Provider and Affiliate Relationships:
Interactive Brokers does not sell its order flow to another broker to handle and route. Through its SmartRouting system, IB evaluates each individual order and determines the best execution venue(s), from the perspective of the customer, where that order may be executed.

 

[volpunter]

I asked about how your SMART order algorithm ranks your own dark pool vs other exchange venues when it determines where to route first. I never asked whether IB sells its order flow nor did I ask about affiliate relationships. I specifically asked about

* Does Timber Hill in any capacity provide or take liquidity in IB's dark pool
* Does your SMART order algorithm in any way prioritize IB's dark pool over other exchange venues
* How do you define "best execution"? Does it take best price into account, only, or also how fast it can fill the order?

I am asking because of the following potential scenario:

Timber Hill might operate in IB's dark pool, it might provide even a better price by taking the other side of IB's client orders but if SMART routes to IB's dark pool first (once, sometimes, or always) it may allow for best price for a portion of the order but not the full order size when other exchange venues provide actually better prices for the full order because of higher liquidity to fill the complete order rather than just part of it. I noticed that price improvement often is only provided on a portion of the client order, not the whole size of the order. Any preferential treatment of IB's dark pool over other exchange venues by SMART will in effect allow your prop trading desk to get an indirect first-look on IB's client orders, something that is in direct conflict with best efforts to fill a client order.

huh?

6. Payment for Orders, Dark Pools, Liquidity Provider and Affiliate Relationships:
Interactive Brokers does not sell its order flow to another broker to handle and route. Through its SmartRouting system, IB evaluates each individual order and determines the best execution venue(s), from the perspective of the customer, where that order may be executed.

 

[def]

You are right about the games many firms play with their best ex stats in regards to partial execution. IB SMART routing's best ex seeks to provide best execution for the full order. You can also define your SMART settings for prices, speed, best rebates etc. As I mentioned a host of times that Timber has no knowledge of IB orders and the way I see it, the dark pool is just another source or liquidity that becomes part of the NBBO. Whether it be TH, IB Clients or other institutions providing liquidity it is just part of the same equation determining where to route orders, avoid HFT gaming, get best fill etc. I will not discuss the mechanics of IB's Smart routing as I would consider that proprietary info and I'm also not privy to the full details. I can only state what I know how we operate as a firm and keep saying, if in doubt, try us out as proof is in the pudding.

Of note (and this is prominently on our site) which to me answers more than enough because as a client you should not care if your order trades against client A, firm B or person C as long as you get the best available execution including price, speed and cost (and I'll add for your sake - for the full and entire order):

• Our results are even more impressive when you consider that other industry-touted statistics don't give you the whole picture. They only discuss the percentage of orders that saw price improvement, and conveniently ignore the percentage of their orders that were dis-improved or had no improvement. In contrast, our statistics are netted, showing the true bottom-line price improvement including, all improved, dis-improved and unimproved amounts.

• Unlike other smart routers, IB SmartRouting never routes and forgets about your order. It continuously evaluates fast changing market conditions and dynamically re-routes all or parts of your order seeking to achieve optimal execution and maximize your rebate.

 

[volpunter]

* How can you claim Timber Hill has no knowledge of IB client orders when Timber Hill operates the dark pool in which IB client orders are routed (and I am exactly asking about more transparency of how often relative to routing to alternative exchange venues)? Something has gotta give...can't both be true, correct?

* Again my question is how do IB client orders end up at TH's dark pool? What is the percentage of first-routes to TH's dark pool vs other exchange venues? Given the SMART algo has no knowledge of liquidity sitting in TH's dark pool how and why would the orders get routed there and under what conditions?

* What? Of course every customer cares whether a direct affiliate of his/her broker trades against his/her orders or not. What are you talking about, Def? I would definitely not get best execution if a large order of mine is predominantly routed to TH's dark pool first (or even worse if SMART routed to TH's dark pool as function of my order size and specific equity name as function of TH's preference for specific names and liquidity). For example, if I wanted to add liquidity via a large buy limit order then TH might be very interested in offering at a fraction of a penny below best offer among all exchanges knowing full well that there might be interest in the market for larger orders in this specific name. Had my order instead been routed into other exchange venues then I would have most likely received a way better price. I am sure you get the drift: You can't claim price improvement as an absolute metric when you cannot provide statistics of how much price improvement would have been had if the order had been routed into the broad market first. All this again points to my question of how eager SMART is to route first to TH's dark pool.

* Your last point is totally and utterly moot considering that TH can immediately take the other side of IB's client orders in its dark pool.

In summary, I still find you are dancing around the essential question how does SMART consider and at times prefer TH's dark pool over other exchange venues? This is an essential and important question because a route to this specific dark pool pits IB's interest directly against the client's best interest.

Can you here in public confirm that IB's SMART order algorithm has no knowledge whatsoever which specific IB client order metrics (equity name, side, size, order type, ...) are preferential to TH's dark pool? If you can confirm that then this would go a long way.

You are right about the games many firms play with their best ex stats in regards to partial execution. IB SMART routing's best ex seeks to provide best execution for the full order. You can also define your SMART settings for prices, speed, best rebates etc. As I mentioned a host of times that Timber has no knowledge of IB orders and the way I see it, the dark pool is just another source or liquidity that becomes part of the NBBO. Whether it be TH, IB Clients or other institutions providing liquidity it is just part of the same equation determining where to route orders, avoid HFT gaming, get best fill etc. I will not discuss the mechanics of IB's Smart routing as I would consider that proprietary info and I'm also not privy to the full details. I can only state what I know how we operate as a firm and keep saying, if in doubt, try us out as proof is in the pudding.

Of note (and this is prominently on our site) which to me answers more than enough because as a client you should not care if your order trades against client A, firm B or person C as long as you get the best available execution including price, speed and cost (and I'll add for your sake - for the full and entire order):

• Our results are even more impressive when you consider that other industry-touted statistics don't give you the whole picture. They only discuss the percentage of orders that saw price improvement, and conveniently ignore the percentage of their orders that were dis-improved or had no improvement. In contrast, our statistics are netted, showing the true bottom-line price improvement including, all improved, dis-improved and unimproved amounts.

• Unlike other smart routers, IB SmartRouting never routes and forgets about your order. It continuously evaluates fast changing market conditions and dynamically re-routes all or parts of your order seeking to achieve optimal execution and maximize your rebate.

 

[rmorse]

DEF, just to be clear, this statement is referring to equity orders, not option orders?

 

[InfoTech]

As I mentioned a host of times that Timber has no knowledge of IB orders and the way I see it, the dark pool is just another source or liquidity that becomes part of the NBBO.

That's quite a claim, given that IB's routing statistics show that around 20% (33% for Nasdaq stocks) of all IB Smart-routed market orders for equities are executed within IB's dark pool.

Liquidity providers in the IB dark pool would not be able to step-up and match or improve the NBBO on market orders without some kind of first-look capability.

volpunter's questions on this topic have been direct, unambiguous, and valid. It does not matter whether or not he trades US equities, or even whether he trades at all.

 

[sprstpd]

That's quite a claim, given that IB's routing statistics show that around 20% (33% for Nasdaq stocks) of all IB Smart-routed market orders for equities are executed within IB's dark pool.

We know who def works for. Who do you work for?