Quote from ssrrkk:
very nice descriptions, thanks for these -- are you trying to implement variations of these yourself?
Quote from braincell:
You're very welcome. No, I just researched the subject out of curiosity.
Like someone here already said, the barrier to entry for this kind of business is very steep. On the other hand, for a smaller operation, it's possible with lower volume stocks where the bigger HFT firms aren't interested, together with hedging the MM operations with correlated instruments. You might be able to get a shot at it. Still, not trivial to set up and you need a starting capital to take the initial losses.
Quote from ssrrkk:
Yes I think you are right on with this as well. I am in fact looking into this and so far it appears opportunities are few and far between, but I think they do exist and are very likely exploitable...
One question: you mentioned the larger firms are interested in lower priced instruments (around $20) due to costs involved -- it seems to me higher priced stocks give a better commission ratio. Am I missing something here? Thanks again.
Quote from Rationalize:
If your commissions are flat, then making 0.01 / 20 becomes larger than 0.01 / 100.
To put it another way ⦠cent-per-share commissions suck donkey balls.
Quote from ssrrkk:
Yes I think you are right on with this as well. I am in fact looking into this and so far it appears opportunities are few and far between, but I think they do exist and are very likely exploitable...
One question: you mentioned the larger firms are interested in lower priced instruments (around $20) due to costs involved -- it seems to me higher priced stocks give a better commission ratio. Am I missing something here? Thanks again.
Quote from braincell:
That's because of the spread. If the bid/ask is 1 tick, which is 0.01, for the $20 stock that is a 0.05% per round trip. For the $500 that is 0.002%, and this may not be enough to pay for costs. Obviously, for $500 stocks, the spread is never 1 tick wide due to HFTs, but some larger value like i mentioned for AAPL.
Quote from ssrrkk:
so in those cases I am seeing that higher priced instruments give you more spread to earn... But of course those have such low volume that the institutions are likely not interested.
Quote from braincell:
Not really. Say for example that the comission is 0.03 %. Any spread that is less than that isn't worth it. If you went from lower to higher priced instruments, you'd see the spread is around that value, in my example 0.03%. This in essence means that the size of the spread we get on the markets is dictated by how low the commission is that the exchanges can offer. The lower the commission, the lower the % they can use to make profits. When 1 tick is less than that value, you need a spread of at least 2 ticks to make the minimum profit (in % terms) to be in business. Then, if you have a spread that's 2 ticks, anyone can place a bid/ask between that and re-tighten it, making it unprofitable. So the fact that higher priced instruments have a larger spread isn't due to low intrest from the institutions, it's actually the direct consequence of the cost of the lowest commission (and highest rebates) available to the market makers.
Quote from clearinghouse:
Can you elaborate on this point further and provide an example? The reason I'm asking is because, let's say I see someone trade out EDGA. It doesn't help me to go hit NASDAQ just because I saw someone trade out EDGA. That alone is not reason to go running off to an exchange where the remove fees are an arm and a leg.
Most people use smart routing, so seeing NASDAQ clear before EDGA or NasdaqBX almost never happens.