Tuesday, March 21, 2017

History of Payment for Order Flow


One thing stands out as a thorn in the side for daytraders, Payment for Order Flow (POF).  POF has been present in United States markets for quite a long time now, as it is a common practice going back to the 80’s where master manipulators like Bernie Madoff fine-tuned the practice for the benefit of POF firms.  POF occurs when a third-party firm pays a brokerage firm to send their orders to them, rather than to the open market.
The POF firm can take the order and either execute it themselves, or pass it on and send to the market for fulfillment against other existing quotes.  The majority of the trades passed onto POF firms are retail trades, which POF firm especially enjoy, as the retail trader is not as knowledgeable of the market and its inner workings.  The typical retail trader does not see true-real time market prices and they remain relatively uniformed. 
Current Regulations
Rules 10b-10, 606 & 607 under the Exchange Act dictate that when these transactions occur, the broker-dealer is obligated to disclose the agreement in public quarterly reports, and also to the customer.  The broker is also required to execute the trade with the best price according the National Best Bid and Offer (NBBO) and with the “best execution”.   
This has the potential to create a conflict of interest, as some exchanges utilize different pricing incentives to brokers to not only look for the best price at the NBBO, but also to trade where the rebates are greatest to them. 
Implications to Traders and Investors
When the typical American consumer places their retail trades from home in the evening, they may stipulate that they’d be willing to pay up to $20.10 for a share of XYZ Stock.  The firm buying these orders can see what they want, and they can see that the NBBO is at $20.09 x $20.10.  This is where they can pass the order onto the public markets and buy the $20.09 offer, or it’s more likely that they will sell the stock to the customer from their own reserves at $20.0999, to give the appearance of improving the execution in return for jumping in front of every other offer at $20.09.  They now are just inside the bid and have the possibility of midpoint pricing in dark pools to buy it back at $20.095.
Role of Technology
In addition to this, POF firms utilize quick direct feeds to see the market milli-seconds before it is available in the NBBO.  In the above example, this means it’s possible that the market has already moved from $20.08 x $20.09.  If the NBBO is still displaying an offer of $20.10, they can give the execution at $20.10, which is the best official offered price, and immediately buy the $20.09 offer they know is coming. 
Even when the buy-sell difference is a fraction of a penny, do not be fooled, this is a multi-billion dollar industry available only to the select few.  
This practice hurts the average day trader as the POF firms process all of the uniformed retail customer orders first, leaving the informed flow as all that’s available to be absorbed and traded by the exchanges. 
Another frustration for daytraders trying to sell at their $20.10 price is that they act as nothing more than a pricing reference point for firms that see the orders first.  The trader only gets to sell at the $20.10 price if the firm seeing their order decides not to sell it themselves, which would likely mean that it is not a good trade any longer.
If you are an experienced, hard-working trader frustrated with your ability to get quality executions, Limits on Payment for Order Flow is probably high on your Wish List.  

Headquartered in Chicago, Great Point Capital, LLC, is a member of FINRA and has been serving the trading community since 2001. Our mission is to be the leader in the equity day trading community by giving the best traders the tools and support to make the most of their trading careers.  Contact Great Point Capital, LLC today, in either our Chicago Office, or our Austin Office, to learn more about how we can successfully trade together with high performance results. 

Tuesday, March 14, 2017

Implications of Payment for Order Flow


Payment for Order Flow (POF) is a common practice that has been occurring in the United States markets for a long time now.  This practice, in fact, was happening in the 1980’s with master crafters Bernie Madoff taking the front lead.  The arrangement of POF occurs when a third-party firm pays a broker to send orders including a large amount of retail orders to their firm instead of to the open market. 
When the POF firm gets their orders, they can either pass it on to the market to be filled against existing quotes, or they can execute it themselves which is more probable.  If the buying firm sees an order for $10.10 for example, they can sell the stock to the customer themselves for $10.0999, giving the appearance of giving a price improvement.  Now they’re just inside the bid and they can take advantage of midpoint pricing in dark pools and can possibly buy it back for $10.095. 
Direct high speed data cables connected directly to exchanges allow their computer algorithms to pick up on the National Best Bid and Offer (NBB) fractions of a second before it’s widely represented, allowing them to see a move to possibly $10.08 x $10.09.  If the NBBO hasn’t changed yet and is still showing an offer of $10.10, they’ll give the execution at $10.10 adhering to the best official offer price, and turn around and buy immediately the $10.09 offer they know is coming. 
The implications to the average day trader are that they are the last to have their orders executed because once the POF firms process their orders including all retail customer trades, traders are left searching for what’s still available. 
All too often, when day traders try to sell stock at $10.10 referring to the example above, they act as nothing more than providing a reference price for the firms that get to see the orders first.  Typically, the only way that the daytrader gets to see at the $10.10 price is if the POF firms decide not to sell it themselves, which means in most cases that it’s no longer a good trade.  This is quite a disadvantage.
After talking with several experienced daytraders, the consensus is in, and most daytraders agree that a Limit on Payment for Order Flow would be on the top of their wish list. 
Headquartered in Chicago, Great Point Capital, LLC, is a member of FINRA and has been serving the trading community since 2001. Our mission is to be the leader in the equity day trading community by giving the best traders the tools and support to make the most of their trading careers.  Contact Great Point Capital, LLC today, in either our Chicago Office, or our Austin Office, to learn more about how we can successfully trade together with high performance results.




Monday, March 13, 2017

Regulations and Trade-At Rule


RegATS, RegNMS and the effect on Markets
RegATS was established in 1999, and actually increased the popularity of ATS (Alternative Trading Systems), as they then became allowed to register as a broker dealer, rather than as an exchange that must adhere to more stringent rules. This caused the volume traded on ATS systems to increase, having the opposite effect on the markets as they quickly lost liquidity. 
The SEC responded in 2005 with RegNMS, which was aimed to unify and streamline the ATS market share by requiring that all orders coming from an ATS be routed through a national market system, creating one combined network. 
RegNMS also required that all exchanges route all orders, regardless of where they originated,  to the trading venue with the best displayed price, which did not necessarily have to be on an exchange. 
These regulations dramatically decreased the strong position that exchanges had on the market, as they lost even more liquidity.  Prior to RegNMS, for example, the NYSE traded approximately 85% of total market share, while after RegNMS that volume dropped to about 30%, and went as low as 20% in 2014. 
Trading in ATS venues and Dark Pools was even more attractive with these regulations, along with a loophole in RegATS which allows trading with hidden prices as long as the total volume of those trades is less than 5% of the volume trading of the stock nationally.  Investors were allowed to go into dark pools and trade anonymously to avoid alerting the HFT firms of what their intentions were.  As more and more investors went to dark pools, exchanges again lost market share. 



SEC Begins a Tick Size Pilot Program to address Trade-At Rule
Various proposals have been addressed to the SEC as options to implement a Trade-at Rule to address the liquidity of the markets and off exchange trading.  One proposal referred to as a Tick Size Pilot Program is in process currently and will evaluate the effect of widening the tick size.  Under this pilot program, the tick size will be increased from one cent ($.01) to five cents ($.05), only on certain piloted securities. 
Three groups and one controlled group were put into place, each with separate rules to trade by. One of the groups is actually using a trade-at rule, while another is required to quote in increments of $.05, and yet another must quote and trade in $.05 increments. 
This Tick Size Pilot Program just started last year in October of 2016, and is schedule to run for two years  For more information on this pilot program, and to receive email updates of the program, visit FINRA.org.
Other systems proposed include the “Grand Bargain” which was suggested by the Intercontinental Exchange, ICE, which suggests a trade at rule combined with reduced access fees 
Another proposed plan by Nasdaq suggests merely a decrease in fees with no trade-at rule at all. 
Our View on Trade-At
Currently the trader's public quote acts as a reference price for POF firms and dark pools to trade in front of him.  If a trader decides to display a quote in the public markets, that trader should get executions when orders come in at or through his displayed price.  The trader only gets executed once POF firms do not feel there is an advantage any longer at that price.  This means that the trader that risks the most in displaying a bid or offer is the last to be filled at that price.
That is not a fair system, and de minimis price improvements should not be used to justify the practice.
Most traders competing with this pricing model agree – a Trade-At Rule is necessary.  
Headquartered in Chicago, Great Point Capital, LLC, is a member of FINRA and has been serving the trading community since 2001. Our mission is to be the leader in the equity day trading community by giving the best traders the tools and support to make the most of their trading careers.  Contact Great Point Capital, LLC today, in either our Chicago Office, or our Austin Office, to learn more about how we can successfully trade together with high performance results.


Tuesday, March 7, 2017

Development of the Need for Trade-At Rule


US Market History
Many events have occurred in modern history that have created what many feel is a need for a Trade-At Rule.   Common practices such as Payment for Order Flow (POF) are causing Exchanges, Regulators and Traders to analyze the current structure of the market and to consider implementing a Trade-At Rule.  
Payment for Order Flow is the agreement that exists when a third-party pays a broker to send their orders to them, rather than to the open market.  This is a cunning strategy we are all well aware of, but yet there seems to be quiet acceptance.  This type of payment incentive developed over time with the introduction of Alternative Trading Systems (ATS) and rapid improvements in computerized algorithmic trading.  This type of payment structure leaves traders fighting for market share.  

Change in Markets due to Advancements in Technology
The combination of ATSs and other off exchange venues along with computerized algorithmic software have had a huge impact on US Markets and how securities are traded today.  Daytraders today dream of a level playing field and efficiency in the market.  
The Stock Exchange of today is not occupied by clamorous traders shouting on the floor while waving papers in the air.  This market today is an age of computer algorithms scanning all available exchanges to buy and sell desired shares in fractions of a second.  
Many of the trades occurring are on an off-exchange venue such as an ATS, an ECN (Electronic Communication Network), or a Dark Pool, where they can act like an exchange but adhere to their own rule set.  These off-exchange venues often offer price improvement, fast execution, and decreased trading costs for investors, making them a desirable way to go.  
This is where a conflict of interest could develops to the firms processing these orders.  Brokers can either route their orders to an off-exchange venue offering the best price with the least costs, or they can send their orders to the venue that pays them the best rebates.  
The introduction of various ECN’s, ATS and Dark Pools has contributed to the development of a fragmented market that now consists of thirteen US Stock Exchanges, over forty dark pools and several ECN’s to choose from.  With so many choices, it is no wonder that people are talking about liquidity, paying for it, and wondering how to keep it flowing within regulations, and in an ethical manner.  While traders are fighting for market share, and wondering where to find liquidity in the market, most traders are also wondering if it’s time for new regulations, or are they long overdue?

Headquartered in Chicago, Great Point Capital, LLC, is a member of FINRA and has been serving the trading community since 2001. Our mission is to be the leader in the equity day trading community by giving the best traders the tools and support to make the most of their trading careers.  Contact Great Point Capital, LLC today, in either our Chicago Office, or our Austin Office, to learn more about how we can successfully trade together with high performance results.

Tuesday, February 21, 2017

IEX Approval in Spite of Opposition


Before the Securities and Exchange Commission, (SEC), approval earlier in 2016, IEX founders Brad Katsuyama and Ronan Ryan faced some strong opposition from several incumbent exchanges that started a campaign against awarding approval to make IEX the thirteenth stock exchange in the United States.   Both the NYSE and NASDAQ wrote detailed letters to the SEC, asking for them to not approve the license for IEX, claiming that it is against regulations and questioning the circumstances for the time delay.  
The unique “speed bump” created by installing a 38-mile fiber optic data cable while disallowing HFT’s from installing cables adjacent to their server, creates a level playing field for all.  Other trading venues allow HFTs to front run orders by using predatory algorithms while connected to their servers to gain a speed advantage in the marketplace.   Even a fraction of a second is all it takes for a trader to lose their shares on order to a front-running HFT.   While the concept of fair trading is an easy one to agree with, firms that are making millions in profits unbeknownst to the investor may not be so thrilled about fair and equitable.  
IEX is Gaining Respect and Growing in Size
In June of 2016 the SEC agreed with IEX and granted approval in spite of the opposition. IEX has swiftly gained the attention and the approval of some of the biggest players on Wall Street.
When considering the billions of dollars that flow through all US Stock Exchanges on any given day, it seems very unfair that only a select few are in an advantageous position to skim thousands in profits from the trades originated elsewhere, just because they have installed the finest and best cables.  As traders, investors, regulators and the general public gain awareness, IEX gains respect.  Enjoying an unprecedented growth rate for a new start up stock exchange, IEX is breaking new ground and with great relief to day traders everywhere.  
Great Point Capital, LLC offers buying power, access to Takion software platform with excellent IT support, and the benefits of working with an experienced team.  We are pleased to currently trade approximately 10% of our volume on IEX, the Investors Exchange.  

Monday, February 20, 2017

Benefits of Trading from Your Firm’s Office vs from Home


While the pros of trading from home are obvious, flexibility to be available for a variety of personal reasons, there are many benefits to working from the office of an experienced trading firm.  
One of the biggest benefits of working with your firm’s office would be the outstanding IT support that comes with it.  Every trader must have reliable high speed internet, which is pretty easy to come by these days even in remote locations.  If there happens to be a residential outage, however, you are at the mercy of your local provider.  When trading from the professional environment of your firm, you will enjoy reliable backup systems, and alternative computers available if you have a hardware malfunction.  A smooth-running machine with a reliable battery backup is imperative to complete your trades on time.  
In addition to top-notch IT equipment and support, one of the best advantages of working in-house with your fellow traders is being surrounded by experienced traders.  Each seasoned trader has developed their own systems for observing and getting a feel for the market, which is hands on learning you cannot acquire from a screen.  This mentoring is valuable especially to a new trader.  You learn to develop your own strategies and feel for the market when your experienced colleagues and mentors are within the same office.  
Unless you need the flexibility of trading from home, we feel there are no cons to working from the firm’s office.  Of course, if that flexibility is a matter of necessity or you are experienced enough to have your own proven strategies to trade from home, Great Point Capital is here to assist you.  We employ several traders in-house at our two national locations, and we also employ several seasoned traders working remotely from their home location.  
With Offices in Chicago, IL and Austin, TX, Great Point Capital is poised to assist you and your market strategies, from any location. We offer the Takion Software Platform, utilizing algorithmic smart order routing, advanced code and connection to exchanges, and all major dark pools.   
 In addition to access to Takion, we provide our own proprietary Instant Messaging (IM) Software, giving you the ability to collaborate with the experienced members in your firm.   This gives our remote traders valuable insight from other experienced traders that you would not otherwise have.

Great Point Capital, LLC, offers all of the same benefits to our remotely located traders as we do for those working in-house.   You’ll be trading with bigger buying power, enjoying aggressive payout structures, and join a team of best traders in the business.  With our two national locations, we are positioned to trade with you on site from either one of our modern offices or remotely from any location.  Contact Great Point Capital, LLC today, in either our Chicago Office, or our Austin Office, to learn more about how we can successfully trade together with high performance results.

Tuesday, February 14, 2017

Pros and Cons of Trading from Home


Many Day Traders choose to work from their own home, rather than in the office of a trading firm, after reviewing the pros and cons. This may be possible once a trader has had enough experience, with a positive proven track record.   Some family circumstances might be dictating the choice, but whatever the reason, there are advantages and benefits to both arrangements.  If you know what they are up front, you can prepare and set yourself up for success.
The greatest advantage of working from home is flexibility.  Flexibility to be available to care for family, sick loved ones, or maybe you are pursuing your own dreams in between some down time.  Just recognize flexibility for what it is, the availability to be there for family when you need to, but it is also an opportunity to slip into comfortable habits that could cause you to miss out on important market activity.   Flexibility must be managed so that distractions do not cut into your working time.  
Working from home requires discipline, and especially in the field of Day Trading.  Home traders must be paying attention and ready to go when the market gets into the swing of first morning trades.  The market moves pretty fast, some days more than others, and you are likely to miss something important if you walk away at an inopportune time.  
This is where being surrounded by colleagues watching the market with you is beneficial.  When in the office and surrounded by experienced traders, you get multiple views of the market which allows you to share opinions with other traders, collaborate and gain confidence in your trades.
What all of this boils down to is that the home Day Trader must possess certain personal characteristics of a strong work ethic and self-motivation in order to trade from home with high performance results.  Focus on your task at hand is imperative for successful trading, multi-tasking personal tasks while trading is not recommended.  
For the experienced Day Trader, working from home is achievable when self-motivation and discipline are applied to a focused, proven strategy.  Success is much more achievable with the backing of a reputable trading firm, such as Great Point Capital.  

Great Point Capital, LLC, offers all of the same benefits to our remotely located traders as we do for those working in-house.   You’ll be trading with bigger buying power, enjoying aggressive payout structures, and join a team of the best traders in the business.  With our two national locations, we are positioned to trade with you on site from either one of our modern offices or remotely from any location.  Contact Great Point Capital, LLC today, in either our Chicago Office, or our Austin Office, to learn more about how we can successfully trade together with high performance results.