Penalty for Adding/Subtracting liquidity at exchange

M

MathAndLogic

Recently I sold a large number of contracts with a limit price that was equal to the bid. I used IB TraderWorkstation and the order was placed through PSE (routed by SMART).

To my surprise, I paid a HUGE penalty which, according to IB, was due to "my limit price being equal to the bid, and consequently subtracting liquidity." Also, IB mentioned that if my limit price were different from the bid, I would be adding liquidity and would not have this problem.

Anyone have similar experience?
 
Sounds like you're on an "unbundled" commission structure. Check your "pricing structre" page for your elected choice, Also, do a search at the IB web page on unbundled/bundled and see if that explains it.
 
Option exchanges are using the make or take model like stocks. You provide liquidity you get paid, you take you pay. Except for the box which has just the opposite where you take and get paid and if you provide you have to pay. Also some exchanges charge a route away fee. If you send an order to the exchange and they route your order away to another exchange that has a better market then they do you will pay a fee. I believe the cboe is the only exchange not charging fees for customer orders.
 
doesn't any trade from the buy-side reduce liquidity? Don't all trades we input reduce the size available?

I don't understand how one could add liquidity, from the buy-side.
 
Quote from stoic:

sounds like a rip-off to me.

Why should a customer be penalized for reducing liquidity???
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What would you call a credit received for adding liquidity? A rip on?

ECN's incentivize adding liquidity because increased liquidity means increased volume and that results in increased profits for them.
 
Quote from ptrjon:

doesn't any trade from the buy-side reduce liquidity? Don't all trades we input reduce the size available?

I don't understand how one could add liquidity, from the buy-side.
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Let's say the market on a particular options is 1.56 at 1.62, with 50 cons on each side. If you put in a 10-contract buy limit order at 1.57 then you are actually adding liquidity to the market, as there are now additional 10 cons at 1.57 that someone can hit.
 
Quote from ptrjon:

doesn't any trade from the buy-side reduce liquidity? Don't all trades we input reduce the size available? I don't understand how one could add liquidity, from the buy-side.
More...
If your buy order is at or above the current market asked price, you get a fill and you have removed liquidity.

If your buy price is below the current asked price, you have added liquidity.
 
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