I am considering openning an account with a deep discount online broker to save commission costs. I was told that many online brokers sell their orders to market making firms through a process called "payment-for-order-flow" Does anyone have a list of online brokers who partake in this practice? For example, if I open an account with IB to take advantage of the penny per share commission, will I be paying up in price for the stock because of payment-for-order-flow? It's seems that this should be something that brokers disclose when they offer these low commissions.
Payment-for-order-flow
- Thread starter silvius
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Thanks for the reply. Do you have the exact location of your reference from IB? The higher rate direct access brokers tell me that the reason the deep discount online brokers are able to offer such a low commission is because of payment-for-order-flow, and it is better to pay the higher commission for the faster direct executions, rather then pay an inflated price for the stock after the order is sold to a market maker firm. I would think that this would particularly apply to to IB since from what I have seen offer one of the lowest commission rates. If this is not the case, why would I want to pay $14.95 per trade for direct access when I can pay only a penny per share through IB for the same type of execution?
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I work for IB and the statement is correct. IB does not pay for or receive order flow for equities. For stock options it is a slightly different matter as the exchanges are now paying for flow if you route an order to them. IB will route to the market with the best price under any condition. However, if one options route is showing the same price as another route, it may make a difference on where an order gets sent.
as for why IB charges 1 penny? Institutions get charged a penny so why shouldn't you. It does not cost any more to send the order. IB's entire process is automated from front to back office. A great deal of volume passes through IB (consistantly one of the top five on the NYSE in program trading (100 million shares+ per week - see, http://www.nyse.com/marketinfo/programtrading.html and the economies of scale are passed on to the clients. One of the ideas behind the brokerage was to level the playing field for all participants.
for the comprehensive statement on the IB site check: http://www.interactivebrokers.com/html/retailAccount/sampleForms/order_route.html
With all this said, along with the penny per share and great fees for options and futures, do not expect any hand holding. The java station is pretty easy to use and even more so for those who actually read the manual. However, there are no graphics, level 2, and other bells and whistles that some firms offer. IB just tries to provide execellent executions.
as for why IB charges 1 penny? Institutions get charged a penny so why shouldn't you. It does not cost any more to send the order. IB's entire process is automated from front to back office. A great deal of volume passes through IB (consistantly one of the top five on the NYSE in program trading (100 million shares+ per week - see, http://www.nyse.com/marketinfo/programtrading.html and the economies of scale are passed on to the clients. One of the ideas behind the brokerage was to level the playing field for all participants.
for the comprehensive statement on the IB site check: http://www.interactivebrokers.com/html/retailAccount/sampleForms/order_route.html
With all this said, along with the penny per share and great fees for options and futures, do not expect any hand holding. The java station is pretty easy to use and even more so for those who actually read the manual. However, there are no graphics, level 2, and other bells and whistles that some firms offer. IB just tries to provide execellent executions.