Interactive Brokers - Receives Payment for Order Flow or Not?

[def]

Timber Hill doesn't decide. IB routes to the best available price. Markets are changing in microseconds.

For example, I think IB may be the only or one of the only firms that will re-route orders whether whole or partially filled from market center to market center when it sees a better price at another venue.

 

[InfoTech]

Timber Hill doesn't decide. IB routes to the best available price. Markets are changing in microseconds.

For example, I think IB may be the only or one of the only firms that will re-route orders whether whole or partially filled from market center to market center when it sees a better price at another venue.

I'm not referring to rapid changes to the posted NBBO, I am referring to price improvement.

Using the simplified example of price improvement in the link below, please explain how Timber Hill would be able to step in front of the posted NBBO to offer price improvement without being provided a first-look?

http://www.sec.gov/investor/pubs/tradexec.htm

 

[def]

Let's step back. The markets are fluid and B/As are rapidly changing. The NBBO at the exact time you submit an order is not necessarily the same NBBO a millisecond later. IB will dynamically route to the venue with the best price and you''ll get price improvement. TH is not giving you may get price improvement. TH is not part of the equation. The routing methodology of IB gives you that improvement. Think if it as there is no middleman taking a slice of your pie.

For example, let's assume the same order is routed to an order flow provider. They are paying for your order. They are not doing this because they are altruists. They get first look and many of them will lift the better offer that came up and flip it to you at the price you provided or perhaps even with time price improvement but that still doesn't mean you got the best possible fill.

 

[InfoTech]

They are paying for your order. They are not doing this because they are altruists.

Understood. But the following statement is from the Raymond James 606 report.

"Raymond James Financial, Inc., during the recent quarter, received payments for directing equity and index options order flow to the following venues: Citigroup, Interactive Brokers, KCG Holdings, Inc., Susquehanna International Group, Wolverine Execution Services. Payments received for order flow executed during the second quarter of 2015, averaged $0.23 per contract."

What sets IB apart from Citi, KCG, SIG, and WEX in this arrangement?

 

[volpunter]

That argument I do not follow: When you route an order and claim there may be price improvement to be had simply as function of changing markets and as function of the latency between order submission on the client's end and the matching of the order at an exchange then the same can be argued about a worse fill than what NBBO was at order generation. On average both should even out given the assumption of a 50/50 chance of the next price being an up or downtick. But IB is claiming a persistent price improvement, in fact you advertise it and try to set yourself apart from the competition. So, I am then wondering, where is this price improvement really coming from?

To start with, I strongly assume you match orders internally if you can before the orders are sent straight to that exchange which your algorithms spot best price at, correct? That in itself would already qualify as non STP. Would you not agree?

Let's step back. The markets are fluid and B/As are rapidly changing. The NBBO at the exact time you submit an order is not necessarily the same NBBO a millisecond later. IB will dynamically route to the venue with the best price and you''ll get price improvement. TH is not giving you may get price improvement. TH is not part of the equation. The routing methodology of IB gives you that improvement. Think if it as there is no middleman taking a slice of your pie.

For example, let's assume the same order is routed to an order flow provider. They are paying for your order. They are not doing this because they are altruists. They get first look and many of them will lift the better offer that came up and flip it to you at the price you provided or perhaps even with time price improvement but that still doesn't mean you got the best possible fill.

 

[InfoTech]

That argument I do not follow: When you route an order and claim there may be price improvement to be had simply as function of changing markets and as function of the latency between order submission on the client's end and the matching of the order at an exchange then the same can be argued about a worse fill than what NBBO was at order generation. On average both should even out given the assumption of a 50/50 chance of the next price being an up or downtick. But IB is claiming a persistent price improvement, in fact you advertise it and try to set yourself apart from the competition. So, I am then wondering, where is this price improvement really coming from?

To start with, I strongly assume you match orders internally if you can before the orders are sent straight to that exchange which your algorithms spot best price at, correct? That in itself would already qualify as non STP. Would you not agree?

If IB price improvement was simply the result of re-routing to chase a changing NBBO, then it would be highly coincidental that approximately 20% of all IB smart-routed (equities) market orders are executed in IB's proprietary dark pool.

Frankly, I am surprised that IB Compliance has approved def's comments on this topic.

 

[sprstpd]

If IB price improvement was simply the result of re-routing to chase a changing NBBO, then it would be highly coincidental that approximately 20% of all IB smart-routed (equities) market orders are executed in IB's proprietary dark pool.

Frankly, I am surprised that IB Compliance has approved def's comments on this topic.

Do you have an axe to grind? Do you actually trade with IB? Do you have specific complaints about their fills? I've been trading with them for over a decade and they are by far the best execution platform I've seen for individual trading.

 

[InfoTech]

Do you have an axe to grind? Do you actually trade with IB? Do you have specific complaints about their fills? I've been trading with them for over a decade and they are by far the best execution platform I've seen for individual trading.

By all means continue using them. I used IB in the past, but I am not here to post a review of them. I'm here to rebut def's claims regarding payment for order flow and the dynamics that lead to price improvement of customer orders.

Best of luck to you.

 

[volpunter]

let's keep this civil bro, I think I and InfoTech asked very valid questions in a highly respectful manner. What's wrong with that? But as you already asked, yes I trade with IB since it opened its doors to the retail crowd and for several years also submit orders as their institutional client. I just do not trade US equities but still am curious about IB's setup on the cash equity side.

Do you have an axe to grind? Do you actually trade with IB? Do you have specific complaints about their fills? I've been trading with them for over a decade and they are by far the best execution platform I've seen for individual trading.

 

[def]

http://video.cnbc.com/gallery/?video=3000281323&play=1
3:25 and 5:20 ish

I gave one example and aspect of price improvement so don't twist my words. I'm not going to go into the details of IB's routing nor give a lesson on how firms game your order. The best I have time for now is to point you to an interview (above link) so you can hear from the top our opinion on PFOF and paste info from our site (and of course if you prefer, one can route directly to an exchange including IEX):

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

What other brokers conveniently leave out
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.
• IB SmartRouting represents each leg of a spread order independently and submits each leg at the best possible venue.

• IB SmartRouting AutorecoverySM re-routes your US options order in the case of an exchange malfunction, with IB undertaking the risk of double executions.
• To help provide price improvement on large volume and block orders and take advantage of hidden institutional order flows that may not be available at exchanges, IB includes eight dark pools in its SmartRouting logic.

Our smart router takes into account transaction costs along with the fee or rebate for taking/adding liquidity when determining where to route your marketable order when the inside market is shared by multiple exchanges. For clients who want even more control of their orders, TWS clients can specify stock and options smart routing strategies for non-marketable orders. For stocks, clients with the Cost Plus pricing structure can elect to have their non-marketable orders routed to:

• The exchange with the highest rebate.
• The listing exchange on the symbol.
• The highest volume exchange that has a rebate for adding liquidity.
• The highest volume exchange that charges the lowest fee for taking liquidity.

For options, clients can choose to send their non-marketable Smart routed orders to the exchange offering the highest rebate. These routing directives can be set on a per-order basis from the "Misc" tab of the Order Ticket, or as a global default setting from the Smart Routing configuration page.


(Re: dark pools - where is it written that dark pools could not have numerous participants making markets or providing liquidity and or an inside quote from a dark pool become part of the internal NBBO of a firm). In any event, the exception stats which are independently audited and while you are no longer an IB client, I would still challenge you to open an IB account, trade side by side with your current broker and then honestly post where you get the best executions.