Is "Smart" order routing a sucker's play (for either fees or execution?)

tommcginnis · Nov 13, 2019

nooby_mcnoob said:
Until now I never knew about booktrader.

This is mesmerizing!

Thank you, Noobs.
Cracks me up.....

I think everyone should *start* with a single screen, on which sits a BookTrader (price ladder) on half the page, and for the other half, a 4hr/1min market graph of Japanese candlesticks, with an ATR with Go/No-Go levels and a Lane's Stochastic to give little hints. (Excuse me.

Little indications.)

The purest of pure Trading.

taowave · Nov 13, 2019

Because I am a weiner and was trying to trade spreads for less than 1.50 per contract

d0rian · Nov 13, 2019

tommcginnis said:
Your "friend" is no friend.
1) Fees: If you're spending "high-5-figures" and are asking these questions, your method needs serious help -- blaming IB or an exchange will do you $zero good.

That's why I'm posting here...trying to learn something I never bothered to look into before. I'm hardly "blaming" IB or an Exchange; the fees are what they and disclosed in full. (Moreover, as another poster stated, an absolute commission figure doesn't really tell you anything without knowing how it relates to my returns; but yes, it's a high # in the absolute which is why I'm trying to bring it down.)

taowave said:
I opened up a second account at TOS and am charged .65 per contract all in...

Hm, so TD TOS doesn't pass along any exchange fees to you? (That alone would have cut my commissions by nearly 40%...) Is there a liquidity-provider rebate as well?

taowave said:
Yes,if I supplied liquidity I would usually get cheaper rates on spreads,but that's a double edge sword as no one would hit my bid,and if I pulled it,my bid instantaneously became the offer.

Yes! I've noticed this for ages too, and I assumed -- as the IB rep seems to have confirmed to you -- that it was liquidity-providers scavenging for rebates...they see a 10 x $0.19 Bid coming in when spread is $0.17 : $0.20 and figure that someone wants an execution, so they wait til you pull it so they can post up at the price they know you're willing to pay.

I once came up with a strategy I theorized might foil this but never got around to trying it out:

Submit a hidden Buy order for 10 x $0.19.
Submit a visible 10 x $0.19 buy, which won't get hit by the rebate scavenger
Pull the visible order > scavenger posts a 10 x $0.19 Offer, which hits your hidden 10 x Buy

Not sure who would be considered the liquidity provider (and get rebate) in this example...does it depend on whether the Hidden order type is natively supported by the exchange (rather than simulated by IB)? If the latter, then it won't help since IB's essentially just auto-submitting the simulated "Hidden" Buy when the Offer hits a specific price...but if it's sitting as a natively-supported Hidden order type at the exchange, who would get the rebate? Technically you're the one providing the liquidity as you were sitting at that price first, right?

FSU · Nov 14, 2019

Yes, TD is "all in" with their .65 rate (accept for 1-2 cents reg fee). This will end up being far cheaper than IB if you are trading products like SPX or VIX which can have exchange fees up to .65 a contract, or if you are taking liquidity on an exchange that charges for that. They also allow direct routing of spreads to several specific exchanges (IB does as well, but it is more difficult to set up). The downside is they wont pass along rebates for adding liquidity.

The problem with your hidden order example is the order is generally kept at the platform level, so when it "sees" the .19 offer it will take it and you will pay for liquidity. What I have found is if you direct the order to an exchange that doesn't charge a liquidity fee you are more likely to be filled.

elt894 · Nov 14, 2019

Keep in mind that IB charges $1 per contract for direct routing options vs $0.65 for smart routed at the lowest volume tier. For me the higher commission usually offsets any improvement I can get by direct routing, but depending on what you're trading it could be different.

taowave · Nov 14, 2019

What I also found odd (and annoying) is I would also cancel my bid to see if the seller would come down,and if he didnt,I would resubmit my bid at the same price and suddenly get filled but at a 1.50 per contract..I believed I was supplying liquidity,but got charged as if I was not

d0rian said:
That's why I'm posting here...trying to learn something I never bothered to look into before. I'm hardly "blaming" IB or an Exchange; the fees are what they and disclosed in full. (Moreover, as another poster stated, an absolute commission figure doesn't really tell you anything without knowing how it relates to my returns; but yes, it's a high # in the absolute which is why I'm trying to bring it down.)

Hm, so TD TOS doesn't pass along any exchange fees to you? (That alone would have cut my commissions by nearly 40%...) Is there a liquidity-provider rebate as well?

Yes! I've noticed this for ages too, and I assumed -- as the IB rep seems to have confirmed to you -- that it was liquidity-providers scavenging for rebates...they see a 10 x $0.19 Bid coming in when spread is $0.17 : $0.20 and figure that someone wants an execution, so they wait til you pull it so they can post up at the price they know you're willing to pay.

I once came up with a strategy I theorized might foil this but never got around to trying it out:

Submit a hidden Buy order for 10 x $0.19.

Submit a visible 10 x $0.19 buy, which won't get hit by the rebate scavenger

Pull the visible order > scavenger posts a 10 x $0.19 Offer, which hits your hidden 10 x Buy

Not sure who would be considered the liquidity provider (and get rebate) in this example...does it depend on whether the Hidden order type is natively supported by the exchange (rather than simulated by IB)? If the latter, then it won't help since IB's essentially just auto-submitting the simulated "Hidden" Buy when the Offer hits a specific price...but if it's sitting as a natively-supported Hidden order type at the exchange, who would get the rebate? Technically you're the one providing the liquidity as you were sitting at that price first, right?

d0rian · Nov 14, 2019

FSU said:
The problem with your hidden order example is the order is generally kept at the platform level, so when it "sees" the .19 offer it will take it and you will pay for liquidity. What I have found is if you direct the order to an exchange that doesn't charge a liquidity fee you are more likely to be filled.

Yeah, that's what I was trying to get at with my natively-supported vs simulated comment...if it's just kept on IB's side and auto-sent when Offer hits the limit price, then it's no different than doing it manually...but don't most US exchanges support native "hidden" order types that sit at the exchange rather than IB-side? And if so, who do they consider the liquidity provider for rebate purposes when one of the hidden orders is hit?

qlai · Nov 14, 2019

d0rian said:
don't most US exchanges support native "hidden" order types that sit at the exchange rather than IB-side? And if so, who do they consider the liquidity provider for rebate purposes when one of the hidden orders is hit?

US Equities exchanges do, but not Options exchanges (as far as I know). The hidden equity orders are getting rebate for providing liquidity but rebate is smaller than for the displayed order.

taowave · Nov 14, 2019

That was my issue as I am predominantly a SPY trader,and most of the time a spread trader..
I did notice that on some equities,I was charged alot less,even when lifting offers..What really pissed me off was buying .03 SPY options to close and getting hit with 1.25 all in..

IMHO,dicking around and bidding/offering to cut costs is a lose lose game...
You know sooner or later you will completely whiff and wind up chasing the market and paying the offer when things move against you.Just to save a penny or so..

At TOS,I can lift offers and hit bids,place market offers and wind up ahead in commish and not chase markets because I tried to provide liquidity and save on commisions.

Trading is hard enough as is,no need to add another level of complexity for zero return

FSU said:
Yes, TD is "all in" with their .65 rate (accept for 1-2 cents reg fee). This will end up being far cheaper than IB if you are trading products like SPX or VIX which can have exchange fees up to .65 a contract, or if you are taking liquidity on an exchange that charges for that. They also allow direct routing of spreads to several specific exchanges (IB does as well, but it is more difficult to set up). The downside is they wont pass along rebates for adding liquidity.

The problem with your hidden order example is the order is generally kept at the platform level, so when it "sees" the .19 offer it will take it and you will pay for liquidity. What I have found is if you direct the order to an exchange that doesn't charge a liquidity fee you are more likely to be filled.

FSU · Nov 14, 2019

d0rian said:
Yeah, that's what I was trying to get at with my natively-supported vs simulated comment...if it's just kept on IB's side and auto-sent when Offer hits the limit price, then it's no different than doing it manually...but don't most US exchanges support native "hidden" order types that sit at the exchange rather than IB-side? And if so, who do they consider the liquidity provider for rebate purposes when one of the hidden orders is hit?

Even if an options exchanges did support hidden orders (which I don't believe they do) it wouldn't help you as there are so many exchanges. So if you had an hidden offer on one exchange and a bid appeared on any of the other 15? exchanges, you would not only pay that exchanges exchange fee, but also a routing fee to that exchange.