Who Profits on Your Stock Orders?

Third party firms that are paying for orders under a Payment for Order Flow (POF) agreement do not enter into those arrangements to lose money, they are making money as well as the broker they are paying.  Reg NMS says that your broker needs to provide you with the best execution available at the time.  So how can two firms, your broker and the third-party firm paying for POF, manage to profit from your order, while still giving you to best possible price?

Maker Taker

One instance where two firms can profit from your order is when they are getting paid for the liquidity you provide.  If your order is not marketable immediately, they send it to the venue that will pay the most for adding liquidity.

For example, providing liquidity on ARCA for a 1000-share order results in a rebate of about $3.00 that goes to the POF firm who paid your broker for the order.

HFT

The other instance is that the POF firm used your order as part of a profitable trading strategy.

For instance, in heavily traded stocks, a good amount of trading is done at the midpoint of the NBBO (National Best Bid and Offer).  

If the market is 30.24x30.25, and you send your order to buy 1000 shares at 30.25, the POF firm sells you the stock at 30.25 (usually 30.24999, which allows them to jump in front of everyone at 30.25), then they sweep through the dark pools and midpoints on exchanges and buy the stock at 30.245.  This nets a profit of about .005/share, or $5.00, on your order.

The POF firm may also be aware that the market is just about ready to turn and go to 30.23x30.24. They know this through their sophisticated predictive algorithms based on trades and changes in quote sizes, combined with the direct market feeds that are faster than the feeds creating the NBBO.

The faster direct feeds might show the market is already at 30.23x30.24, but the NBBO won’t show that for few milliseconds.  This makes it easier – they can give you the “best execution” available on the current official source, the NBBO, at 30.25, then turn around and immediately buy the stock back at 30.24, which became the true offer in the market.

It is vitally important for traders to have control of their orders.  The amounts made from these orders is negligible for the retail customer that is only trading a couple times per month, but to the HFT firm doing this across thousands of accounts every day it adds up to millions of dollars.  

Contact Great Point Capital today to take control of your orders and seize additional profits per trade.  We have the knowledge of the market, the experience and resources to assist you in routing your orders so that it is most profitable to you.  

If you need a broker with capital, and access to orders including those in dark pools, contact us today to see how we can work together to realize your true trading potential.  

Learn more about Great Point Capital today.  Our 100+ prop traders actively trade the firm’s capital, increasing their leverage and returns.   We are one of the select few firms able to offer access to Takion Software Platform, enhancing your trading performance.  To take control of your orders and to capture additional profits, contact Great Point Capital today.