Penny Pilot Issues exchange fees

[nonprophet]

At IB option exchange fees are charged separately from IB commissions (unbundled pricing), and for Penny Pilot Issues both BOX and PSE charge substantial fees (45¢ resp. 50¢ p.contract) for marketable orders (those that remove liquidity) while giving a 25¢ rebate for non-marketable orders (add liquidity). That’s 70-75¢ difference per contract.

So I submit a SmartRouted, non-marketable limit order that is working at an exchange, say at BOX, and after a while it is executed, not at BOX, but at PSE (with Smart orders you cannot control the execution venue).

Rebate? Wham! I’m charged the additional 50¢ PSE fee because, I assume, the order was never working at PSE, so it was never in their books until it was executed, so from PSE perspective it was a marketable order.

Does anyone recognize this issue?

 

[OutOfOptions11]

Perhaps a result of the make or take pricing model?

 

[nonprophet]

Quote from OutOfOptions11:

Perhaps a result of the make or take pricing model?

Absolutely. Problem is that I start off as a maker (at BOX in my example) and end up as a taker (at PSE), turning a rebate into a fee. To me it seems an (unintended?) side effect of SmartRouting in combination with make-or-take. Unless I still misinterpret the sequence of events....

Hey hot shots, get your noses out of Natenberg and let’s talk trading!

 

[Euler]

Nonprophet,

Your example, although possible, does not seem very likely to me. Has it actually happened?

As an aside, I don't think that IB is a very good place for the type of order you propose. IB/Timber Hill derives 4/5 of their income from market making and only 1/5 from brokerage; this represents a potential conflict of interest for the order type you propose, and that conflict of interest seems to me to be reflected in their commission structure and other policies, which appear to be designed to discourage anything resembling market making on the part of their brokerage clients.

As an aside to that aside, pretty much every brokerage available to traders with less than ~$100million seems to do some sort of proprietary trading that may result in competition with their clients, even though it's not necessarily reflected in their fee structure or policies. Does anyone know of one that doesn't do any own-firm trading at all?

 

[nonprophet]

Quote from Euler:

Your example, although possible, does not seem very likely to me. Has it actually happened?

Thanks for your reply.

Yes it’s happened, as described in the example, but also with execution ending up at AMEX, which turns out better because AMEX charges no taker fee, in case of QQQQ that is, other ETF’s are charged 15¢ both make and take, and that's just AMEX, it’s a free for all (bottom of page).

As an aside, I don't think that IB is a very good place for the type of order you propose.

Actually, with any “smartrouting” equivalent, I’m quite convinced it happens everywhere all the time, just folks don’t know/care/understand: a limit order is working at one destination, then the price is met at a different destination and the order is executed there: you end up a taker and, if applicable, pay an extra fee.

In fairness even a penny price improvement thanks to SmartRouting will compensate for the fee, but if you take your trading (costs) seriously, you want to control your execution cost: with SmartRouting you have no control over the final destination and, more importantly, over what you'll be charged.

I don’t seem to understand why IB, who co-owns BOX, doesn’t lower the BOX direct routing fee to the same level as SmartRouting, that would solve that problem and boost BOX volume. Perhaps it has to do with the conflict of interest you describe.