Is IB designed to just feed liquidity to Timber Hill?

Quote from Occam:

What seems "destructive and couterproductive" to me is your apparent ignorance of what internalization is or how much it can cost you and other market participants. This isn't about explicit sbotage/manipulation -- it doesn't need to be for internalization to be very costly, in aggregate.
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Please explain to me in simple terms...
How a Limit Order is adversely affected by your theories...
(Especially since I get price improvement on 20-30% of Forex Limit Orders on IDEALPRO...
Ranging from 0.1 to 0.5 pips).

If your theories only apply to Market Orders...
Then you are a FISH... and please go away.
 
Quote from DeeDeeTwo:

Please explain to me in simple terms...
How a Limit Order is adversely affected by your theories...
(Especially since I get price improvement on 20-30% of Forex Limit Orders on IDEALPRO...
Ranging from 0.1 to 0.5 pips).

If your theories only apply to Market Orders...
Then you are a FISH... and please go away.
More...

This is the beauty of internalization.
It is not obvious even to some experienced traders how
they get fleeced.
It is all about negative selection.
The internalizing BDs and dealers that purchase
order flow interact with it before it hits
an exchange or ECN where your limit order sits.
This gives them a license to jump the public queues
and grab the trade ahead of you even though you
may have signaled your intention to trade at that price
before the flow arrived.
The cost to you is negative selection.
Your buy does not get filled when the bid holds, but rather
only when it becomes the new ask.
Similarly, your sell is filled mostly
when the ask becomes the new bid.
If your business is to compete in capturing the spread,
you will be at a severe disadvantage compared to someone
that gets first pass on the order flow.

It is important to realize that your limit order gets fleeced
not only by your own BD, but by all BDs or traders
that jump the queue.
The current market structure gives them a license
to hijack a fill that would rightfully be yours
if price/time priorities were enforced.
 
Quote from DeeDeeTwo:

Please explain to me in simple terms...
How a Limit Order is adversely affected by your theories...
(Especially since I get price improvement on 20-30% of Forex Limit Orders on IDEALPRO...
Ranging from 0.1 to 0.5 pips).
More...

I don't need to explan myself. It turns out there's a very good explanation from none other than Thomas Peterffy, CEO of IB, submitted to the SEC in 2000, as to why internalization is bad. Bad, for all market participants, except of course for the internalizing B/D itself, with its captive order flow.

It's a pity IB doesn't abide by these prinicples when dealing with its own customers, at least according to its latest order routing report, which states that IB may internalize customer order flow to its Timber Hill "affiliate".


A system that rewards the ability of market makers
to internalize orders or pay broker dealers for order flow rather than rewarding them for posting
better prices is not in the best interests of customers.

...

Rather than internalizing orders or accepting payment for order flow or other troublesome incentives, broker-dealers
should abide by their duty of best execution and route orders to the market showing the
best price. As recently noted by Chairman Levitt, “systems for broker-dealers recently have
emerged that include sophisticated algorithms for automatically routing investor orders in a
security to the best market.” Broker-dealers should use these systems or, less ideally, manually
route each order to the market displaying the best price. This will provide a powerful incentive
for an exchange to narrow the spread and be at the best price before a broker-dealer makes its
routing decision (so that the exchange gets the order). If an exchange is not at the best price but
a broker-dealer nonetheless sends it an order (e.g, because of error or because the broker-dealer
does not have systems sufficient to route each order to the best market), that exchange should be
required immediately and automatically to send the order to any away market displaying the best
price. The exchange thus would have no opportunity to step up and benefit from execution of an
order if it did not post the best price before that order was received.
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I am happy that I don't have to worry about these micro market concerns. It's too much vig to be paying if you don't get the right execution. And even if you're right the vig is killer.
 
Quote from etile:

I am happy that I don't have to worry about these micro market concerns.
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It would seem that the only trading classification taking risk these days are the equity prop / retail futures crowd.
 
Quote from maler:

This is the beauty of internalization.
It is not obvious even to some experienced traders how
they get fleeced.
It is all about negative selection.
The internalizing BDs and dealers that purchase
order flow interact with it before it hits
an exchange or ECN where your limit order sits.
This gives them a license to jump the public queues
and grab the trade ahead of you even though you
may have signaled your intention to trade at that price
before the flow arrived.
The cost to you is negative selection.
Your buy does not get filled when the bid holds, but rather
only when it becomes the new ask.
Similarly, your sell is filled mostly
when the ask becomes the new bid.
If your business is to compete in capturing the spread,
you will be at a severe disadvantage compared to someone
that gets first pass on the order flow.

It is important to realize that your limit order gets fleeced
not only by your own BD, but by all BDs or traders
that jump the queue.
The current market structure gives them a license
to hijack a fill that would rightfully be yours
if price/time priorities were enforced.
More...

Great post...
But I'm not really getting "fleeced"...
Because I have 500 orders out there at any given time...
And I am completely agnostic which ones get filled.

It's more like my volume is being reduced somewhat...
And I'm being chiseled... which is the Way of the World...
And it's all built into my Business Model.

After giving this some more thought...
Here is a specific example how IB and everyone with Order Flow...
Games their Customers by reducing their volume.

Today I made 800 trades:

NYSE = 560 (70%)
SMART = 36 (12%)

Of the 36 SMART trades 12 were a 0.0001 price improvement...
So an IB affiliate jumped the queue by 0.0001 and I got filled...
And I got about $1.00 in total price improvement.

But on the flip side...
There are probably 50 trades...
Where ANOTHER BD jumped in front of me by $0.0001...
And let's say I missed an execution in 50% of those cases...
For a loss of 1/2 the spread of $0.04 times 300 shares...
(Average NYSE trade size)...
So a loss of $0.02 x 300 x 25 = $150.

So this "exemption" which allows BDs to $0.0001 jump you...
Results in massive ratio in their favor...
They give me $1.00 and I lose $150 profit in lost volume.

This is what I mean by NYSE et al being corrupt, but intelligently so...
They just nickel and dime a Limit Order trader...
So they can keep the scam going for a 100 years...
And any competent trading firm can absorb the small losses.
 
Quote from DeeDeeTwo:

G
Of the 36 SMART trades 12 were a 0.0001 price improvement...
So an IB affiliate jumped the queue by 0.0001 and I got filled...
And I got about $1.00 in total price improvement.
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The word MAY is in those reports for legal reasons. There were no IB affiliates jumping any queue against you on those trades above as I've previously stated. Occam will come back without any evidence and state otherwise but he will again be wrong.
 
Quote from def:

The word MAY is in those reports for legal reasons. There were no IB affiliates jumping any queue against you on those trades above as I've previously stated. Occam will come back without any evidence and state otherwise but he will again be wrong.
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I specifically DID NOT state...
That IB is trading against me or jumping me or their own Customers...
But that OTHER BDs most certainly are...
And this is all perfectly legal...
And how the game has been played forever.
 
Been using IB for 10 years so I'm a loyal customer...

BUT I do also think the brokerage side of IB is structured to feed liquidity to timber hill.

It does not mean IB is actively bucketing your orders or doing anything to harm your orders. Your trades wouldn't do any better at another brokerage, but IB obviously sees the value in having alot of order flow run through their system.

This is why IB has NEVER implemented full ECN functionality. You can route directly to island or arca, but you can't use any of the ecns' smart functions. You must use IB's own smart routing.

I believe this is also why IB never implemented the new software package they acquired from futuretrade a few years back.

For those of you who remember, futuretrade had a very advanced trading platform that looked quite similar to the other modern platforms like instaquote, redi, etc. IB originally promised to transition from TWS to this new modern platform, but it never happened.

I'm guessing management at IB decided that the new platform gave too much functionality to the user and might reduce order flow through IB smart.
 
Quote from SeekingAlpha2:

Can someone please explain

Does this mean IB sees my stop and is actively hunting it to trigger my stop to

A: Get timberhil to profit
B: get profit from commission

Is IB just a high tech bucketshop. Maybe more traders would be profitable if brokers were honest and didn't trade against you.

And how will IB get incentive to be honest when Dodd-Frank act in 1 month will make it illegal to open trading account in another country.
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Why does it matter if they are bucketing your orders? Maybe if you trade with huge size where you can move markets, you may be concerned for liquidity reasons if you're getting squeezed. But I assume nobody on this board trade anywhere near that kind of size.

I bet you more traders would be profitable if they stop assuming "they" (insert conspiracy target) are out to get them. Trading is a tough gig, if you're sweating sub-penny fills and HFT-front running. Honestly, I think one would more likely go crazy trying to fight the algos at the micro level.

On the flipside, so much money are concentrated into black-box strategies, you get some pretty good confluence moves to the upside and down side on larger time frames. If the bots are bleeding you in the micro game, bleed em out at the macro level.
 
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