Ranking of brokers offering price improvement
- Thread starter freeman311122
- Start date
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Good points, SCHW....;
limit orders help also . Actually a market order can work real well on liquid/ volume stuff,[exits] especially since some don't need a real good execution to make a profit.
What you conveniently forgot to mention is that in the majority of cases, on your 5000 XYZ order you may earn a liquidity maker rebate of $10, but you will lose $50 to adverse selection (assuming $0.01 spread on 5000 shares) (on top of your $4.50 commission), as almost all retail marketable orders are filled off-exchange, until the market moves against you which is when HFT and other traders suddenly compete for filling your resting limit order. The major commission-free brokers have almost always the better order execution. I learned this the hard way.
But you probably knew that.
Robert Morse
Sponsor
I did a google search. "What percentage of listed equity orders are traded on ATS." The result was "For all market-capitalization groups of stocks, at least 10% of trading dollar volume (11.37% of share volume) is attributable to ATSs, with the largest market share occurring in medium capitalization stocks (12.30% of dollar volume and 12.86% of share volume).Oct 1, 2013." If you place a limit order with a free route, do you think they post that order on the ECN with the highest rebate to keep that credit or do you think they leave that internal in their Dark Pool for you to trade with. Remember, they pay a fee to that broker no matter where it executes. With a large number of Lite ECN/Exchanges and dark pools, it will be hard to buy on the bid or sell on the ASK without the stock moving. Why not get paid when you do get an execution. I do not agree with your math.
Robert
I just did a 10 second Google search which said that 90-95% of retail orders don't go through lit exchanges. I conclude that I have a very small change of a retail market order hitting my standing limit orders when I use a direct access broker and route my limit orders to exchanges. This is exactly my experience.
I'm not sure if I understand what you are trying to explain with your rhetorical question - I'm confused who is "they" and "you" in your logic.
I can't disagree with your last sentence - why not get paid a rebate when I do get filled via adverse selection (that you admit to in your sentence). But again, the rebate is small compared to the slippage from adverse selection. It's like picking up pennies in front of a steamroller.
I spent years putting in limit orders with a reputable direct access broker, thinking I was smart as my broker doesn't pay for order flow and supposedly gives me unbiased best executions via "smart" orders, or directly routed orders. I routed my orders either "smart" or manually to all major exchanges, but I rarely got a fill without the market moving. When the market doesn't move, I typically see the volume increasing by thousands and thousands of shares, while my 1 lot order just sits there at the NBBO bid (buy orders) or ask (sell orders) waiting to be filled on the exchanges. In addition, when the spread is 1c I am not allowed to place an order within the spread, while off-exchange venues and market makers are allowed to do just that, and I see thousands if not tens of thousands of shares being traded at the bid, at the ask, or in between, while my small order is still sitting at the NBBO and patiently waiting. Until the market moves, HFTs and other traders compete for my order for an instant gain, and I immediately lose 1c per share or whatever the spread is (or more).
I just switched to a zero commission broker, and all my orders get instantly filled, with an average slippage of ca. $0.001 (1/10th of the $0.01 spread) from the midprice.
So please convince me why on Earth I would stick with a direct access broker using limit orders, almost never getting filled with matching market orders, and pay the spread on almost all my orders via adverse selection when the market moves; and to add insult to injury, pay a commission on top of it?
Looking forward to hear your explanation.
The system appears to be rigged. As most retail order flow happens off exchanges, and because of the unfair limitation of $0.01 tick size that applies to retail investors but not to internalizers and market makers (very hard to understand why this rule applies selectively), retail investors are basically forced to go with zero commission brokers who use market markers.
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Robert Morse
Sponsor
Why do you care about only those orders? I'm not trying to tell you that you are better at any one type of broker. Every trader needs to determine what is best for them. I would be angry if I were offering 5000 shares at 15.00 at a "free" broker and I see shares trading at 14.999 in front of me. Yes, the buyer did better, but the firm working my order did not have my best interest in mind, IMO. When it comes to Lightspeed, we offer access to ECNs and Exchanges and Dark pools. We offer Trading from 4am to 8pm et. We offer a choice of software. We offer trading to traders from many countries. We offer access to Locates for stocks not on the Easy to Borrow list. There is more than one criterion for choosing what is best for that trader. We are not best for everyone and the same for the "free" brokers.
I provided specific use cases from years of experience. I have reason to believe that for all stocks that trade at typically $0.01 spreads, and probably many others that trade at larger spreads, limit orders at brokers that provide "smart" routing and direct access routing and that charge commission, can't compete with zero commission brokers.
I don't know your commission, but my previous broker whose name starts with "Interactive" charges ca $0.0067 per share of a marketable order, and ca. $0.0025 per share of a limit order after exchange rebates, and just like you routes to major exchange, dark pools, ECNs, and what not, via a "smart" routing algo. For stocks with $0.01 spread and marketable orders, the roundtrip commission alone is bigger than the spread. So however "smart" the "smart routing" is, I will overpay with certainty. My limit orders (hoping to get rebates) are almost never filled before the market moves. "Smart" means smart for the broker and/or for the market makers, not "smart" for the customer.
My new zero commission broker fills my orders at ca. $0.001 from the midprice, with no commissions. Please explain how you can beat that after your commissions.
You provided no evidence that your execution is better for retail orders of S&P500 stocks. If so, please be specific, and elaborate for which type of which orders your execution is more favorable for the customer, and provide evidence like statistics on all-in trading cost, if possible.
Robert Morse
Sponsor
It seems that you, tradegoodstocks, are under the impression that I'm trying to convince you to move to Lightspeed. I'm not. You are happy where you are. All good. What you have works for you. The only data I have access to are the number of calls we have received since the beginning of COVID from customers of online brokers complaining about the speed and the quality of execution in both equities and options. Then then try us and tell us there is a difference.
No I'm not stipulating that you are trying to sell something here. I'm rather genuinely interested in understanding which use cases in term of the types of equities, order sizes, or speed requirements would benefit from limit orders at a direct access or fee-based "smart" routing broker vs the major commission-free brokers that route to market makers. For marketable orders of most S&P500 stocks with small to medium order sizes, it is mathematically impossible to beat the commission-free brokers, as per my math and evidence above. So setting aside traders that trade very high volumes and require very high speed execution, I guess that leaves the question of how does a limit order based routing strategy compare to immediate execution with marketable makers (at about $0.001 cost per share based on my experience). Like I said in my experience limit orders incur trading cost of almost the entire spread on average, if not more; but it would be nice to see some more comprehensive study or statistics on this.
Let me tell you the disadvantages of zero commission brokers:
1. Transaction volume may be limited, free is not unlimited
2. For stocks with large spreads, such as BID10.00 ASK10.20, when you want to sell 100 shares at the closing price of 10.00, your order will be executed by a high-frequency trading company at 10.10, and the quote you get is 10.00
3. For stocks whose stock prices fluctuate rapidly, your quotes are often difficult to execute.