Great Point Capital has discussed Payment for Order Flow (POF) and how High Frequency Trading (HFT) firms profit on your trades. We’ve shared how Maker-Taker affects the way that market participants execute trades. Now we would like to show you what you can do to improve your trading returns within this complex and often predatory environment.
Order Routing Options Limited with Traditional Broker
If you are currently trading through a traditional retail broker, you probably have a limited number of ways for routing your order, if any. Routing your order is typically limited to a “smart” route, or perhaps a preference for NSDQ or ARCA. Some of the more advanced firms might let you choose IEX. These limited choices will not help much, as you do not see the pricing difference between the selections, and you cannot change them easily if something changes in the market.
Traders use “smart” routes, which are simply computerized algorithms that aid traders in buying or selling stock, with the main goal of making the search for liquidity easier. Smart routes are not a trading system, but are instead a set of instructions that are based on certain conditions set by the trader, and are customized by the trader or pre-set by the broker or software. Thus, they are limited by the broker, or the software. In addition to limitation on orders, a trader’s ability to post bids and offers through ECNs is also limited to which venues your broker has subscriptions to use.
Most retail brokers have agreements in place with third party firms where they get paid for sending orders to them for execution. This is the obviously the “smart” route if it is one of your choices. In the past, brokers had networks of people who would work together to execute your order. Your commission paid for that network and the cost to execute your order. Today, executing your order is no longer an expense for your broker, but has become a profit center.
Who Profits on Your Order?
The third-party firms that are paying for orders under a Payment for Order Flow arrangement obviously aren’t losing money on the transactions either, they are making money as well as the broker. Reg NMS states that your broker has to to provide you with the best execution available at the time. So how is it that two firms manage to profit from your order, while still giving you to best possible price?
To take control of your orders and recognize additional profits per trade, contact Great Point Capital today. We have the experience, and the resources to help you route your orders so that it is most beneficial to you.
Great Point Capital has been serving the trading community for almost two decades. Our 100+ prop traders actively trade the firm’s capital, specializing in equities and equity options. We are one of the very few firms able to offer access to Takion Software Platform, enhancing your trading performance. For control of your orders and to capture additional profits, contact Great Point Capital today.
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