Let's talk routing...

I have IEX routing available but haven't used it. Certainly going to give it a look.

Normally I'm adding liq to ARCA which is good but had two outings this week. The first outing hurt because I had lots of resting orders that got cancelled while I stepped away for a minute. So I went to nsdq just out of convenience.
 
Sorry I am ignorant on this point. If I route to IEX through IB, does it use IEX's smart routing technology? If not, what is the point of routing to IEX through IB?
 
Hello Dustin,

Have you got some advice in terms of order types and routes for exiting really bad trades( price is running away in the wrong direction ). I don't like to place hard stops as you sometimes get caught in a fat finger which may get arbed back to equilibrium rapidly. I am wondering if there are some algos that are effective to quote aggressively and get out fast, but don't get triggered by a fat finger ...
 
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Dustin said:
It's been a while since I posted anything here, but this holiday zombie market has me wondering how to fill the time. So, let's talk about routing. It's an area that most new traders don't focus on, or realize the importance of. A good routing strategy is an integral part of your overall trading plan.

Liquidity: To add or to take
The most basic variable is to add or take. If you are trading thick stocks like F, BAC, then adding requires a lot of patience and you're competing against the rebate capture algos. If you get a fill, it means you are probably wrong on direction in the near term. Depending on your trade horizon that may be ok.

If, like me, you are trading more volatile stocks with 2-10c spreads then it's not as hard to be patient and add so long as the stock isn't ripping. I have two main routes (more on this later), one for adding, and one for taking. For slower moving stocks, I always try to add. For fast stocks, I take when necessary, often through multiple levels.

A quick look at the math, and why you should always add when possible:

XYZ 20.00x20.01

If you add 500 at $20.00 you have saved yourself a penny ($5) plus gained the rebate (500x.2=$1). At a .3 commission the trade cost you appx $.50.

If you take 500 at $20.01 you have paid a penny ($5) and paid the fee of (500x.3=-$1.50). At a .3 commission the trade cost you appx $3.

That's $2.50 ($3-$.50) plus the $5 spread capture for a total of $7.50 if my math is right. When you are adding with wider spread stocks, the numbers increase significantly. Do that all day and you can be looking at $150-300+ in savings per day, and that really adds up over the course of the year. This is a business and you should always be looking to reduce costs.

Besides the cost factor to fills, there's also the psychological factor. By getting a better price, you now have a better stop and can stay in the trade longer. If, like me, you usually add when a trade goes against you, a better price also allows you to get bigger than you would have otherwise. Don't underestimate the advantage of good fills, this is a very important aspect to my trading.

What routes should I use?
As I mentioned above, I primarily use only two routes.

For adding:
There are a few ways to handle this. The goal is to have the least impact on the L2, but be displayed to capture the rebate. If you want a full rebate with a basic NSDQ/ARCA/BATS limit order, then just display 100 and pick your price. That's the most simple, but it has more impact on L2 (hft/front runners).

The next is a primary peg with NSDQ/ARCA/BATS. This means, if you want to buy, you enter your limit price and it will add your order to the bid anywhere at or below your limit. Always only display 100. The goal is to capture the full rebate, and possibly get price improvement better than your limit price. This still has some impact, and occasionally hft will sniff out your order limit and fill you there. You still got your fill at a price you were willing to pay, and captured the rebate.

The last, and what I use, is a primary peg with BATY. This works the same as above, but it has an inverted pricing model so it often gets taken first. You are more likely to get a fill, but you don't get a rebate. I'm willing to give that up because the price improvement and fill rate is more important to me in the types of stocks I trade.

I didn't touch on midpoints, although those are definitely an option for some strategies. There are obviously many more routes, and maybe you guys have some ideas that we can learn from.

For taking:
Since the advent of hft, taking liquidity has become much more difficult when using basic routes. If you are a small trader (100-200 shares) then it won't make a difference, but for any more than that you need to be able to take liq quickly before hft can cancel or front run. Many brokers offer a smart router, but beware as those don't usually account for these issues. They are a tool for your broker to collect fees and commissions. They often take the inverted ecn's first, thereby collecting the fee, and also charging you an extra fee on top of your commission. The fills are poor and expensive. Also, some shadier prop brokers give a look to a third party in exchange for a fee. If you are at one of these brokers, it's not a bad time to go somewhere reputable like Lightspeed or IB.

For a few years I used a PDQ router, which was the best at the time. That was before IEX, which is now the best out there for the average guy. Their fill rate on taking is something like 96% which is also my experience. The delay they built in keeps the hft from cancelling or front running, and it really works. Often times you can even tell they didn't want the fill, and they scramble to immediately cover. I'm talking about the IEX smart router, not their normal route. I use lightspeed and to set it up you create a custom order with IEXG hidden as the route. I'm not sure how to do it at other brokers.
https://www.iextrading.com/trading/router/

That's all I have for now. I'd love to hear any ideas on how to improve on my suggestions, or any questions.
More...

Thanks for this! What other good routes do you recommend to get rebates for adding liquidity, I know BATS and ARCA already, any other decent ones, specially during afterhour events like earnings etc, any good routes that you recommend to enter during the extended hours?

I know BATS has the higher rebate (i think it is $2.50/1,000 shares), I have fusion, how do I make sure that when I add liquidity I don't get switch from adding to removing, are there any settings to make sure I don't get slid to removing, I want to make sure I get a rebate of $2.50 per thousand shares, also does anyone else recommend any other routes other than BATS, I know ARCA pays a rebate when you add liquidity but I'm not sure the amount, are there any other routes other than BATS and ARCA that pay high rebates when adding liquidity or is BATS and ARCA the only 2?
 
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