Stop hunting

[qlai]

I always assumed that most brokers manage stop orders internally and only send them to exchanges/MMs once triggered. Certainly I would expect this from reputable ones like TDAmeritrade. If I understand below article correctly, they are sent to MMs before triggering. Which means MMs actually know where the stops are! Someone please tell me it ain’t so.

https://alphacution.com/robinhoods-trailing-stop-orders-extreme-profitability-by-design/

 

[Nobert]

I always perceived it, as if it were like that, (without knowing, assumed so) ;
same goes for Volcker rule. Can't be naive about that and suddenly, one day, either one of these two happens :

Woops
or
i told you so.

Don't want to be on a woops side.
Stay sharp & slightly paranoid. (Smiles)

 

[guru]

https://www.quora.com/How-does-a-market-making-algorithm-see-my-stops

 

[Same Lazy Element]

I always assumed that most brokers manage stop orders internally and only send them to exchanges/MMs once triggered. Certainly I would expect this from reputable ones like TDAmeritrade. If I understand below article correctly, they are sent to MMs before triggering. Which means MMs actually know where the stops are!

MMs can see non-marketable limits and conditional orders for some duration of time. Somehow I recall 30 seconds, but I might be thinking of something else - my recollection of Reg NMS is vary hazy and I don't play in that sandbox at all. Reg NMS has a whole set of rules about non-marketable limit orders such as time limits, held/not-held etc, improvements etc. I'd be very surprised if any these rules are explicitly broken by any of the brokerage houses, but I am sure they stretch them as much as their compliance department would let them.

Secondly, there is no "hunting" going on, a market maker has no interest in triggering a single retail stop. However, non-marketable limit orders (and even more so, complex conditional orders like stop-limit or MiT) have a fair bit of optionality and market makers are happy to pay to own that optionality. That's what PFOF is all about and a source of retail flow that has a lot of non-marketable or conditional orders is very valuable.

Stay sharp & slightly paranoid. (Smiles)

Maybe. Probably better to be informed, understand the details and leave paranoia to drug addicts.

 

[Nobert]

Maybe. Probably better to be informed, understand the details and leave paranoia to drug addicts.

Genius is not only in saying that which is dif in a simple way, but perceiving that which is dif/overloaded with info & details in a simple way, e.g - ,,that is dangerous, avoid it"
(doesn't fit the context, but i hope you get it. Kudos for the knowladge)

 

[qlai]

MMs can see non-marketable limits and conditional orders for some duration of time. Somehow I recall 30 seconds, but I might be thinking of something else

Are you talking about options? I don’t think equities have anything like that.

Secondly, there is no "hunting" going on, a market maker has no interest in triggering a single retail stop.

Common, I am sure you can see how a market maker can profit from triggering a bunch of retail orders.

In any case, the question is - do HFTs get actual stop orders from brokers like TD and RH?

 

[shh]

MMs can see non-marketable limits and conditional orders for some duration of time. Somehow I recall 30 seconds, but I might be thinking of something else - my recollection of Reg NMS is vary hazy and I don't play in that sandbox at all. Reg NMS has a whole set of rules about non-marketable limit orders such as time limits, held/not-held etc, improvements etc. I'd be very surprised if any these rules are explicitly broken by any of the brokerage houses, but I am sure they stretch them as much as their compliance department would let them.

Secondly, there is no "hunting" going on, a market maker has no interest in triggering a single retail stop. However, non-marketable limit orders (and even more so, complex conditional orders like stop-limit or MiT) have a fair bit of optionality and market makers are happy to pay to own that optionality. That's what PFOF is all about and a source of retail flow that has a lot of non-marketable or conditional orders is very valuable.


Maybe. Probably better to be informed, understand the details and leave paranoia to drug addicts.

Are all the purchasers of for example Robinhood's order flow market makers? Or non-MM hedge funds can also purchase order flow and screen it permanently (until it is cancelled)? Thanks in advance for the explanation

 

[Same Lazy Element]

View attachment 235285
Common, I am sure you can see how a market maker can profit from triggering a bunch of retail orders.

To trigger a stop-loss, you need to trade through some level away from the current touch. Unlike canary limit-orders, these types of trades require real impact (and thus losing money) and it's hard to imagine a situation when it would be an advantageous to do so. On the other hand, informational advantage of stop-orders is huge and you can design all sorts of alphas or adversity models around them.

View attachment 235285
In any case, the question is - do HFTs get actual stop orders from brokers like TD and RH?

Again, I am not a specialist beyond the basics so take this with a big pinch of salt. My understanding of Reg NMS is that if the broker routes an order to a specific ATS, the liquidity providers there have a right of first refusal (under trade-through protection, of course) for all orders, marketable or non-marketable. That's the basis of the whole PFOF business model and it would make sense that it includes both simple limits as well as contingent orders.

So in short, the answer is probably "yes, but it depends on the broker and their SOR model". For example, I had an email exchange with a rep for a large retail broker about their stock flow data and he said something like "in the best interest of our customers, we route non-marketable limit orders to maker-taker exchanges directly or to liquidity providers who can post orders there." To me that sounds like they route everything to their favorite MMs and let the customers get bent.

 

[TimtheEnchanter]

I always assumed that most brokers manage stop orders internally and only send them to exchanges/MMs once triggered. Certainly I would expect this from reputable ones like TDAmeritrade. If I understand below article correctly, they are sent to MMs before triggering. Which means MMs actually know where the stops are! Someone please tell me it ain’t so.

https://alphacution.com/robinhoods-trailing-stop-orders-extreme-profitability-by-design/

In a thin futures pit, you can hunt for stops, but if you are the market maker of TSLA you just cannot!

 

[Same Lazy Element]

Are all the purchasers of for example Robinhood's order flow market makers? Or non-MM hedge funds can also purchase order flow and screen it permanently (until it is cancelled)? Thanks in advance for the explanation

You have to be a broker-dealer to participate in the PFOF, it's actually a pretty large regulatory headache. Of course, hedge funds have purchased BD entities and now participate in market-making. Non-HFT players do like to see this data and sometimes pay for detailed breakdowns, although not at the same speed/cost as market makers - it's very helpful for high frequency stat arb and such.