Author Topic: Best Execution and Order Flow  (Read 2402 times)

rukawa

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Best Execution and Order Flow
« on: October 12, 2017, 10:18:34 PM »
Every time there is a discussion of the relative merits of Interactive Brokers the subject of best execution comes up. And sometimes people will talk about the fact that most discount brokers sell order flow to HFT's. And that IB is worth it because you will save more on execution costs than you will pay in fees. My question is what does all this mean? What is the NBBO? What is order flow? What is best execution? Can anyone give an example of best execution on IB vs a discount broker for a limit order? And similarly for a market order?

What order of magnitude would the difference be on a trade of lets say $10000
« Last Edit: October 12, 2017, 10:32:01 PM by rukawa »


Hielko

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Re: Best Execution and Order Flow
« Reply #1 on: October 13, 2017, 01:32:41 AM »
With IB you will in general pay less in fees. Period.

And while this is from IB itself, so question is how reliable it is, they say that on average you gain $0.05 per 100 shares traded. https://www.interactivebrokers.com/en/index.php?f=1340

I think the lower fees are way more important than the better trade execution. If you buy 100 shares at $100 for you $10K transaction you pay something like $0.70 if you are taking liquidity and less if you add liquidity (sometimes you actually get paid). Most other (cheap) brokers charge $5+ for that. But it depends on what you exactly buy. Not everything is cheaper with IB. Especially stuff like buying a million penny stocks etc.

WneverLOSE

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Re: Best Execution and Order Flow
« Reply #2 on: October 13, 2017, 01:45:25 AM »
Most of the customers of IB are more of a traders than buy and hold investors so for them execution is important since buying at 10 and selling at 10.01 at the end of the day makes you about 44% in a year, if you bought at 10.001 and sold at 10.009 you would make an annualized return of 33.8%.

basically the more you trade the better you have great execution. if you invest like me and buy or sell only a few times a year this won't matter much but for some types of investors / traders it does.

IB greatest edge is its wide array of markets, low commissions, very good execution VERY LOW rates to borrow money and from a business side they plan on becoming the underlying infrastructure for most other brokers.

I like them, they don't mess around with you, no hidden fees for reports, support , order change and stuff like that that used to cost me thousands of dollars with my previous broker.
« Last Edit: October 13, 2017, 01:49:36 AM by WneverLOSE »

bobp

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Re: Best Execution and Order Flow
« Reply #3 on: October 13, 2017, 06:37:53 AM »
I don't know what best execution means any more.

Example: A stock was 10 to 10.02. I offer 2000 at 10.01 and my order shows, so it's 10 - 10.01 now.
I cancel my offering and with the the stock back to 10 - 10.02, I hit the 10 bid with my 2000.
I sell it at 3 different prices averaging higher than 10.01 which is where I offered originally. This is all in a 2 minute span in a completely inactive stock, a spac.

The fragmenting of markets with dark pools and who knows what else has made it impossible to know the real market. Maybe with another broker I would have gotten a different execution. Better or worse I don't think I'll ever know, and I doubt you can trust any broker's statistics on best execution. I could be wrong as I don't understand any of this any longer. I use etrade btw.

boilermaker75

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Re: Best Execution and Order Flow
« Reply #4 on: October 13, 2017, 06:51:46 AM »
I don't know what best execution means any more.

Example: A stock was 10 to 10.02. I offer 2000 at 10.01 and my order shows, so it's 10 - 10.01 now.
I cancel my offering and with the the stock back to 10 - 10.02, I hit the 10 bid with my 2000.
I sell it at 3 different prices averaging higher than 10.01 which is where I offered originally. This is all in a 2 minute span in a completely inactive stock, a spac.

The fragmenting of markets with dark pools and who knows what else has made it impossible to know the real market. Maybe with another broker I would have gotten a different execution. Better or worse I don't think I'll ever know, and I doubt you can trust any broker's statistics on best execution. I could be wrong as I don't understand any of this any longer. I use etrade btw.

This is just anecdotal, since I haven't kept track. But when I put in limit orders I much more often get execution at better prices with IB than I do at Schwab.

Hielko

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Re: Best Execution and Order Flow
« Reply #5 on: October 13, 2017, 06:53:24 AM »
Isn't that always the case? Unless you are a huge customer at multiple brokers you can never get enough data to know where you get the best execution. That's why you need a 3rd party audit. They can compare all the transactions to the NBBO at that point in time, and calculate how much (if any) price improvement people get.

KCLarkin

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Re: Best Execution and Order Flow
« Reply #6 on: October 13, 2017, 08:31:32 AM »
The fragmenting of markets with dark pools and who knows what else has made it impossible to know the real market.

Not an expert on market structure but I think this is why IBKR gives you better executions than retail brokerages. They actually try to route you to the best exchange, including dark pools. Retail brokerages are bribed to send trades to a specific exchange.

If the market is quoting 1.00(bid) x 1.05(ask) (spreads aren't usually this wide but just using as an example), I will generally get very close to the ask on a retail brokerage. On IBKR, I get closer to the midpoint. Especially with options.

This is all anecdotal, since there is really no way to tell if you get good execution. Did you get a better price because the market moved by the time your order hit the exchange? This is why retail brokerages can earn so much from selling order flow. Retail clients can't even tell they are getting screwed. But you can actually "feel" the difference in execution. Even though it might only be a fraction of a penny per share, it really does feel like night and day between IBKR and the retail brokerages I use (TD, Scotia, BMO). Not sure if US brokers are any better.

But if you are only trading $10k, you can safely ignore execution. There are exceptions, illiquid options for example. But otherwise, this is not worth worrying about as long as you use limit orders. The retail brokerages provide good value for small retail clients.

bobp

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Re: Best Execution and Order Flow
« Reply #7 on: October 13, 2017, 11:16:04 AM »
"Did you get a better price because the market moved by the time your order hit the exchange?"
My example was a spac that doesn't trade. What doesn't make sense is that they wouldn't pay 10.01 when I was offered there but paid higher when I removed my offering and the spread was 2 cents. It could be fees from taking my offering, I don't know.
Bottom line is it doesn't matter much to me what's happening, although I appreciate your response. I do think the markets have gotten really screwed up because of fees, routing, dark pools etc.

But, commissions get lower and lower and spreads get tighter so I guess it's ok.

muscleman

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Re: Best Execution and Order Flow
« Reply #8 on: October 13, 2017, 11:35:55 AM »
What do you guys think of Merrill Edge? It offers a lot of free trades per month, and it is one of the few brokers who do not sell order flow.

https://www.stockbrokers.com/guides/order-execution

Does it place orders directly into the exchanges?

stahleyp

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Re: Best Execution and Order Flow
« Reply #9 on: October 13, 2017, 11:57:43 AM »
I use IB and Merrill Edge. I have money at Merrill Edge primary for the free trades and credit card promotions (mostly for credit cards since I don't trade a lot). Their travel card gives you 2.625% cash back when bonus is used for travel and their reward card gives 5.25% on gas, 3.5% on groceries/Costco and 1.75% on anything else (you need $100,000+ to get those higher bonus levels otherwise it's less cash back). Merrill Edge's website isn't great but it's better than IB.  They also gave me a little bit of cash to move money over. All in all, I'm satisfied.
Paul