Interactive Brokers - Receives Payment for Order Flow or Not?

NeoTrader

NeoTrader

Hello! I´ve checked previous threads over this subject and most said that IB doesn´t receive Payment for order Flow, but I saw a brokerage review that says that they do. So I decided to check directly with IB and I found two documents written by them that, apparently are contradicting or one of them is just outdated(one is from 2013 and the other has no date). Currently, in their website, it advertises that they don´t receive it.
One of the documents (the one that has no date) says this: "1.IB's Order Routing System: IB does not sell its order flow to another broker to handle and route. Instead, IB has built a real-time, high-speed Best Execution Order Routing System (SmartRoutingSM), which is designed to optimize execution price, speed and total cost of execution for stocks and options." Link: https://www.interactivebrokers.com/...rmSampleView?ad=order_routing_disclosure.html
The other (from 2013) says this: "Payment for Order Flow – Stocks: IB receives payments for several types of order executions in US stocks. Interactive Brokers is connected to Automated Trading Centers and also to both Electronic Communication Networks (ECNs) and Alternative Trading Systems (ATSs). Non-directed orders submitted though IB SmartRoutingSM are routed to the market with the best firm prices available at the time of order routing for immediate execution, with the preference of routing orders to electronic exchanges. IB’s SmartRouting system is designed to provide IB customers with the best available order execution. IB has relationships with certain liquidity providers to which it routes orders, in which IB receives payment for order flow in exchange for routing marketable orders to these market centers." Link: https://www.interactivebrokers.com/download/1Q_2013_IB_ORDER_ROUTING_REPORT.pdf
What am I missing here? Did IB use to take payment for order flow in 2013 and now it doesn´t anymore? Am I mixing things up and these things aren´t really contradictory? Does this SmartRoutingSystem really provide DMA or does it just get the execution THAT THE LIQUIDITY PROVIDERS THAT PAY IB offer at that moment? (Sorry for the bundle of questions, but I think they´re all related).
 
Are you asking about equity orders or option orders? And, would you call it PFOF if Timber Hill had a first look or got directed order flow?

In the end, all retail option orders can be sent to a MM that will pay for a first look or be guaranteed a %. I'm not sure it effects your P&L or your ability to get a fair price, as long as your order is not held in their system.

My complaint has always been that their smart complex option orders are not sent to the COB at the exchange. They are held in their system until paired with another IB client or deemed doable by their system.
 
Hello, thank you for the answer! I´m talking specifically about equities... Sorry I didn´t make this clear before. My concept of PFOF is the one I the one I read: the order doesn´t go directly to the market and makes a "pit stop" before it does(if it ever gets there), which would probably cause the execution to be not as good as it would if it had gone directly to the market.
 
I'm less familiar with how their equity smart route works and If it is routed 1st though an equity dark pool, then to an exchange. If you choose a destination yourself, and avoid "smart", it will likely avoid that. All our smart or managed equity routes go to a dark pool first. We have had no complaints about execution quality and the client is happy to avoid ECN fees. We offer both "smart" and DMA to our clients and let them choose with each order. (This would not be for an IB client but for a client that custody at another clearing firm)
 
NeoTrader said:
Hello! I´ve checked previous threads over this subject and most said that IB doesn´t receive Payment for order Flow, but I saw a brokerage review that says that they do. So I decided to check directly with IB and I found two documents written by them that, apparently are contradicting or one of them is just outdated(one is from 2013 and the other has no date). Currently, in their website, it advertises that they don´t receive it.
One of the documents (the one that has no date) says this: "1.IB's Order Routing System: IB does not sell its order flow to another broker to handle and route. Instead, IB has built a real-time, high-speed Best Execution Order Routing System (SmartRoutingSM), which is designed to optimize execution price, speed and total cost of execution for stocks and options." Link: https://www.interactivebrokers.com/...rmSampleView?ad=order_routing_disclosure.html
The other (from 2013) says this: "Payment for Order Flow – Stocks: IB receives payments for several types of order executions in US stocks. Interactive Brokers is connected to Automated Trading Centers and also to both Electronic Communication Networks (ECNs) and Alternative Trading Systems (ATSs). Non-directed orders submitted though IB SmartRoutingSM are routed to the market with the best firm prices available at the time of order routing for immediate execution, with the preference of routing orders to electronic exchanges. IB’s SmartRouting system is designed to provide IB customers with the best available order execution. IB has relationships with certain liquidity providers to which it routes orders, in which IB receives payment for order flow in exchange for routing marketable orders to these market centers." Link: https://www.interactivebrokers.com/download/1Q_2013_IB_ORDER_ROUTING_REPORT.pdf
What am I missing here? Did IB use to take payment for order flow in 2013 and now it doesn´t anymore? Am I mixing things up and these things aren´t really contradictory? Does this SmartRoutingSystem really provide DMA or does it just get the execution THAT THE LIQUIDITY PROVIDERS THAT PAY IB offer at that moment? (Sorry for the bundle of questions, but I think they´re all related).
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Many brokers route their orders to firms who pay them for the free look. IB doesn't do that. IB routes to the market center where it can get the best price. Some exchanges - particularly option exchanges - have mandated payment for flow schemes where orders sent to that exchange will receive payment.

If you want detailed metrics take a look at IB's monthly metric reports where we provide a transparent view of the all in cost of our execution. It would be nice if other firms would provide the same level of transparency. https://investors.interactivebrokers.com/en/index.php?f=14711&ns=T

RMORSE - it is slightly misleading to say "all retail option orders can be sent to a MM" that's the same to me as all people can take a gun and kill a lion. Just because you can, doesn't mean you should do it. IB doesn't do it.

NeoTraderto IB does not take PFORF as you define it above.

I should also note for IB Smartrouting, under the tiered structure for US equity you will receive or pay the ECN fees depending on which venue your order gets routed. If you're adding liquidity and doing size, you could end up with a negative commissions. Furthermore, you can configure Smart Routing in a number of ways including - seek price improvement, don't include dark pools, dark only, maximize rebate, maximize fill and more. Check out our site for details.
 
I agree with Victor to a point, yesterday I can show you orders I put in sells at $12.74 on Denny's getting filled at $12.75 because the Market Maker was finishing up his VWAP at a little above $12.75. I got an extra $35 bucks (sell 3500 shares (of my 16,000 share trade I was working out.) at $12.74 and it got filled instantly!).


The problem I see is on many Options and low grade Brokers, Fidelity will give you .0015 extra if they can match their orders with another order. Schwab, Etrade and Ameritrade will enhance order execution price if they don't have to pay all those ECN fees or the Market Maker their sending it to is the Ax!
 
of course is what you describe PFOF. Any diversion of an order away from a direct route to the exchanges is not straight through processed. If Timber Hill has the slightest ability to act on an IB client order before the order hits the exchange order matching engine it is considered payment for order flow. Whether Timber Hill compensates IB for that or not does not make a difference, it does not even make a difference whether they offer a slightly better price if they take the other side of the trade. Whether the client is economically better or worse off I am in no position to judge. But someone pushing lots of options trades through IB should be in the position to comment given he/she runs any sort of transaction cost analysis.

Note: I am not making any claim in what practices IB engages or does not engage in.

rmorse said:
Are you asking about equity orders or option orders? And, would you call it PFOF if Timber Hill had a first look or got directed order flow?

In the end, all retail option orders can be sent to a MM that will pay for a first look or be guaranteed a %. I'm not sure it effects your P&L or your ability to get a fair price, as long as your order is not held in their system.

My complaint has always been that their smart complex option orders are not sent to the COB at the exchange. They are held in their system until paired with another IB client or deemed doable by their system.
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Could you please clarify whether Timber Hill or any of Timber Hill Group's affiliates or subsidiaries have access to the order (view or the ability to act upon) before an IB client's options order hits the exchange's matching engine? Your statement which I copied below is slightly opaque.

Thanks.

def said:
"NeoTraderto IB does not take PFORF as you define it above."
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def said:
Timber Hill has no knowledge of client orders.
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How does Timber Hill decide whether or not to price-improve an IB customer order without seeing that order before it is executed at the NBBO posted on an exchange?
 
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