Letter to IB regarding routing options

T

Turok

I sent the following to IB this morning. In the past I have found IB to be quite responsive when approached.

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Hello XXX and XXX. I want to thank you again for your service and assistance. Since I spoke to you last, I have done some more testing and have developed a couple more questions/comments.

SuperSoes Routing:

Routing directly to SuperSoes (through what IB simply calls "SOES") is an interesting endeavor. When the user queues a limit order, the "last price" is used to fill in default limit price box (known in the IB interface simply as "price"). Of course we all know that the last price has no direct connection to the inside market and in fact can wander significantly from the NBBO. This behavior makes the SOES routing mechanism almost completely useless since one can't count on the limit price being any reflection of the NBBO.

If you fire off an order using the default price, much of the time it gets instantly canceled (because it is off in the direction that would cross or lock the market) and much of the time in the other direction you have entered a limit that is perhaps further away from the market than you really want to pay. Each time I want to route to SOES I must queue an order and then manually adjust the price either up or down (can't even predict the direction I will need to move it since the last price wanders to either side because of ECN activity).

The price box on a queued SOES limit buy/sell order should in my mind be filled from the best MM offer/bid. Though I am a programmer, I am not familier with your data feeds etc, but it seems to me that if you can derive the "BEST_ECN" price at all times from your data feed, you could also derive the best MM price and use that to fill the limit price box.

If the programmers can't derive this best MM price, then it would be second most productive for the users to simply have the interface fill the box from the NBBO price. Very much unlike the current situation,this would provide a stable starting point that the user can count on rather than the scattershot last price situation.

SuperSoes has become a very fast, reliable and quite liquid route these days. An IB interface that lets traders take advantage of this system would be a boon to our trading. Thanks for listening.

Next subject...(old subject actually)

Going back to the situation we were discussing a few weeks ago regarding the execution of IOC orders through Arca/Redi/Brut.

I received this forwarded message from Dave: (thanks BTW)

>Dave, he is able to sandwich the orders because
>he is using IOC orders on MB. We ARE NOT
>offering this for directed orders. Best execution
>will do this on BEST or BEST_ECN orders

While I appreciate your attention and efforts in this matter, I need to voice my disappointment in the chosen solution. Frankly your BEST_X routing systems may be great for Newbies, but they cause FAR more trouble then they are worth for the more experienced traders who have the skills to work their own orders. Dave can attest to the number of threads on the lists that are titled something like "IB BEST ISN"T BEST". I often have numerous orders hanging out there live and am able to manage my risk and position though my knowledge of the various routes and their execution behavior. Your BEST_X routes are actually somewhat nebulous (to us) in their behavior and quite often leave us scratching our heads and squealing "say what?".

I certainly hope that someone will reconsider this decision. All three of these ECNs offer excellent liquidity to the trader. Much of the time this liquidity isn't directly on the inside, but is well within a usable and reasonable range. All three of these ECNs offer quite reliable executions through IOC orders (I have personally executed many, many hundreds of them through my MB account). It will be a shame if the many excellent traders on IB are unable to utilize his liquidity that lies so close, but just out of reach. Frankly it's frustrating to watch my competitors take what could be mine.

Thanks for your time and I certainly hope that this email, whether productive or not, is at least seen as constructive.

Respectfully

JB
 
Turok,

all I can say is good luck, but don't get your hopes up that anything will change. After IB deprived us of REDI and ARCA active order routing I've invested a considerable amount of time and energy myself in order to get them to reconsider those changes but so far to no avail. Not even David Fried's (def) much appreciated efforts in this matter had any effect.

While the introduction of SuperSOES has alleviated some of the issues with IB's BEST routing considerable problems remain with respect to system reliability and performance as well as routing functionality. The most pressing issues IMO are lack of backup routing facilities, general routing delays especially around the open, BEST's inability to deal with reserve size without introducing considerable unnecessary delays, and the inability to trade in the pre-market and after hours session with market participants that can only be reached via SNet.

Below is my full list of BEST's deficiencies and new problems introduced by IB's disabling of REDI and ARCA routing.

Transparency and reliability concerns:
======================================

Two key characteristics of an intelligent order routing system that are needed to make it suitable for short-term trading and scalping applications are reliability and transparency:

- IB routinely experiences outages of some of its ECN connections and it often takes considerable time until the connections are restored (a while ago Instinet was unavailable for almost a full week). Since IB's BEST routing depends on the availability of those connections it becomes critically impaired at those times. Having REDI and ARCA routing available as a backup in such situations has often been critical in the past.

- IB also routinely experiences disruptions in its various ECN and Nasdaq quote feeds. Since IB's BEST and BEST_ECN routes rely on those feeds for their routing decisions they are rendered unusable by such outages. Again having REDI and ARCA routing available as a backup in such situations has been a blessing in the past.

- The BEST route often exhibits slowness and delays in acknowledging orders and cancellations especially in the first and last hour of trading. REDI while not immune to such problems tends to be more responsive under high load in my experience.

- Unfortunately, unlike similar systems provided by REDI, ARCA, Cybercorp and others IB's BEST and BEST_ECN routes are lacking any customer documentation. You cannot have full confidence in a system where due to a total lack of documentation it is impossible to know how the order will
behave. Without knowledge of the rules of how the order will be worked one cannot assess the route's suitability for specific market conditions.


Order routing deficiencies:
===========================

- Lack of intelligent short sale order routing logic that actively works the order along the inside market ("pressing the bid") as used to be available with REDI's and ARCA's active routing features. This kind of functionality can only be provided in an efficient way by an ECN since a broker-side implementation would introduce additional delays due to the need to constantly cancel and resubmit orders.

- Lack of access to SelectNet in the pre-market (9:00 - 9:30 EST) and after hours session (4:00 - 6:30 pm EST) as used to be availabe via REDI and ARCA. A number of MMs and UTP exchanges are active and provide liquidity after hours in most liquid Nasdaq stocks and many MMs respond to SelectNet orders placed before the open especially the last ten minutes when the "trade or move" rule is in effect. Even after the introduction of SuperSOES SelectNet remains the only execution system provided by Nasdaq in the pre-market and after hours session. IB's NASDAQ route stops working at 4:00 pm and is not enabled until 9:30 am in the morning and is thus of no use in this context.

- Lack of a "sweeping" type of limit order that spreads the order within the price limit over as many market participants as required based on their display size and addresses all of them simultaneously instead of only working the current inside price level. In addition such an order should "overhit" market participants for the full remaining order size once the price limit has been exhausted. While REDI LMT type orders provide this
functionality IB's BEST does not thus causing additional delays and potentially missed fills in my experience.

- BEST seems to have major problems when accessing liquidity on an ECN that is working a reserve order and is displaying less size than the order BEST is working. In such
situations BEST does take out the displayed size but then just sits there doing nothing for several seconds until it will hit the refreshed quote.

- Lack of an active order route that takes special measures to reduce the chances of odd lot fills as provided by REDI. BEST on the other hand by defaulting to ISLAND as its ECN of choice in fact maximizes the chance of ending up with an odd lot fill.

- Lack of a route that actively works orders but specifically excludes SOES as a destination. Under certain market conditions SOES is unlikely to produce fills while equivalent SNet orders stand a better chance to be
filled. IB's BEST routing seems to use both SOES and SNet interchangeably and using SNet does not seem to "overhit" MMs beyond their display size (or at least not on the first attempt). SNet-only as well as "overhitting" functionality used to be available with REDI and ARCA. While this issue
should become moot for Nasdaq NMS securities with the rollout of SuperSOES it will remain valid for Nasdaq SC securities.
 
Hello Dlincke.

I think it's clear from your post that you require a broker that provides many more options than IB does. Perhaps you already have such a broker.

I trade for a living and with my trading style I have found that I am much more profitable with IB then I was when I used a broker with the options that you describe. Personally, I'll take the 5K per month that I save in commissions and live with just a bit more restrictive interface.

I don't live in a fantasy world where I believe that I can get something for nothing. I get unusually low commissions while my execution speed is faster than at my backup broker (MB Trading / Realtick). I have found the overall reliability to be at least as good as MB (MB went down on me twice today while IB ticked along just fine). I accept most of it's limitations as a by product of the commission structure.

I'm pretty self sufficient and I will continue to profit from IB while asking for small changes. I don't expect them to become MB, and at those prices my bottom line has clearly shown that all those options provide negative value.

JB
 
as i already mentioned in another thread ("problems with supersoes") - routing to NASDAQ has become useless, since supersoes came around. ib keeps on telling, that bid/ask on SOES is the same like on NASDAQ - but that's simply not the truth.

anyway - fortunately i gave up routing to NASDAQ - instead i do all my trades now through BEST_ECN - the most considerable advantage there is that you don't have to wait for an uptick if you wanna go short. since shorting on NASDAQ often turned out to be almost impossible (because of a lack of upticks in a fast declining market) - i am now pretty happy for having shifted to BEST_ECN - for what i've seen til now - it works quite well.

nevertheless - apart from this issue i am over all satisfied with the services and the reliability (and of course the fees) of IB. i trade with them for 4 months now - and the tws not even went down one single time.

so if you choose IB as your broker - i would say the benfits there are much greater than the few compromises you have to accept.
 
Originally posted by Turok
I think it's clear from your post that you require a broker that provides many more options than IB does. Perhaps you already have such a broker.

I trade for a living and with my trading style I have found that I am much more profitable with IB then I was when I used a broker with the options that you describe. [...]
More...

Turok,

until about two months ago all the problems and deficiencies I've described above were not present in IB's platform. They were introduced when for some unknown reason IB decided to cripple the functionality of the REDI and ARCA ECNs. So it's not like I'm asking them to add any new bells and whistles. I just wish they would restore the level of functionality that they used to provide until two months ago.

This attempt to force customers to exclusively use their own routing system by shutting off access to all other avenues of execution (even though they may be superior in certain respects) also runs counter to IB's stated corporate mission of providing their customers with a platform that facilitates the fastest and best execution possible. And how removal of access to whole pools of liquidity in the pre-market and after hours session is advancing the cause of "best execution" is definitively beyond me.

That said, as far as options and listed stock trading (except for the lack of NYSE Direct Plus orders) are concerned IB's routing technology is absolutely top notch and I haven't come across any retail broker yet that could measure up even remotely. I'm also hearing nothing but good things about trading futures with them.

Dave
 
>ib keeps on telling, that bid/ask on
>SOES is the same like on NASDAQ - but
>that's simply not the truth.

You are right and they are wrong, but heck, if they even gave us the Nasdaq NBBO quotes rather than the last sale it would be a HUGE improvement.

It's a SS route, so give us SS qoutes (they do it individually on all the ECNs after all). But at least, don't use the freakin time and sales numbers to fill in our limit orders, that just makes the route useless.

>anyway - fortunately i gave up routing to
>NASDAQ - instead i do all my trades now
>through BEST_ECN - the most considerable
>advantage there is that you don't have to
>wait for an uptick

It is nice that their algorithm will hold your short order until an uptick. Of course with SOES as you point out if you send it in during an uptick it just cancels.

JB



 

i just opened an account with IB.. i will be trading with it for the first time on monday.. are you guys saying that if i route my orders to REDI that REDI wont execute against other ecns and market makers? i hope i have misunderstood.. thanks..

-qwik
 
Originally posted by qwiktrade
[...] are you guys saying that if i route my orders to REDI that REDI wont execute against other ecns and market makers? i hope i have misunderstood [...]
More...

No, you did not misunderstand that. About two months ago IB decided to cripple the functionality of REDI and ARCA for their customers. Up to this day I have not been able to get a satisfactory answer out of them as to why they did that.

All marketable orders sent to REDI or ARCA are immediately returned as cancelled except when there's liquidity available on the ECN book at the NBBO. Furthermore, it is no longer possible to take out liquidity on the book that resides outside the NBBO (which is Turok's main bone of contention). This inability to execute out of market used to affect BEST_ECN as well until we brought it to IB's attention. If IB had chosen the obvious solution of using IOC orders in the first place in order to avoid having BEST_ECN orders potentially end up with MMs (as I had suggested to them) instead of taking the sledgehammer approach of globally crippling all the active ECNs, they could have spared us this host of new problems (see my prior post). This is another example where IB is sacrificing "best execution" to an inferior technical implementation by denying their customers access to readily available pools of liquidity.

The only thing those two ECNs are still good for with IB is for posting non-marketable limit orders.

Dave
 
Maybe, for some reason they are not informing us, they can not use IOC orders. I mean they JUST got stops to work!

Can we get def to take a look at this and get back to us? Perhaps he can shed some light on this. Because unless I'm missing something the IOC route would pretty much solve the issue.
 
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