Author Topic: Payment for order flow - backdoor kickbacks  (Read 907 times)

LongHaul

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Payment for order flow - backdoor kickbacks
« on: October 05, 2018, 01:48:43 PM »
Interesting article on PFOF which quantifies the fees.
I hate PFOF.   Super sleazy in my opinion.

https://blog.wealthfront.com/silent-assassin-fees/


muscleman

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Re: Payment for order flow - backdoor kickbacks
« Reply #1 on: October 07, 2018, 12:30:41 PM »
This article is hard to understand. For the payment of order flow example, if a broker asks for premium payment of order flow, why would the exchange just give it to them? I am a bit confused here.

LongHaul

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Re: Payment for order flow - backdoor kickbacks
« Reply #2 on: October 08, 2018, 01:11:46 PM »
This article is hard to understand. For the payment of order flow example, if a broker asks for premium payment of order flow, why would the exchange just give it to them? I am a bit confused here.

Where there is mystery, there is margin.  Hard to fully understand for me also.

I believe the exchange then sells the info to high frequency traders who front run the orders. Clearly the HFT must be making money off paying for the PFOR or they wouldn't buy it. 

Interactive brokers doesn't do this (or minimally).   

I would imagine that fees are quite a bit higher if one includes the losses from PFOF in the other discount brokers total fees.

Spekulatius

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Re: Payment for order flow - backdoor kickbacks
« Reply #3 on: October 08, 2018, 04:29:20 PM »
This article is hard to understand. For the payment of order flow example, if a broker asks for premium payment of order flow, why would the exchange just give it to them? I am a bit confused here.

I think the HFT are the true customers of the exchanges. That may be all one needs to know.
To be a realist, one has to believe in miracles.

Hielko

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Re: Payment for order flow - backdoor kickbacks
« Reply #4 on: October 09, 2018, 12:56:05 AM »
I'm not quite sure if that articles uses the right terminology to describe what happens.

As far as I understand, and of course I could be wrong, brokers sell their order flow to HFT firms, not to exchanges. The HFT firms look at the orders, and execute those orders that they think have zero/negative alpha (for example: market orders from retail investors). Retail investors gain a little bit here as well since the HFT firm has to provide a better price than the NBBO to make this happen (although it's usually a very pathetic $0,0001/share or something like that). Orders that the HFT firm then doesn't want to execute are routed to the various exchanges and executed at the NBBO (if marketable). The big downside of this scheme is that the remaining order flow that is hitting exchanges is more toxic (from the point of view from a market maker) and as a result spreads might go up, and so in the end even the retail investor that is getting a price improvement from the HFT firm might actually be paying more.

muscleman

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Re: Payment for order flow - backdoor kickbacks
« Reply #5 on: October 09, 2018, 01:33:51 PM »
This article is hard to understand. For the payment of order flow example, if a broker asks for premium payment of order flow, why would the exchange just give it to them? I am a bit confused here.

Where there is mystery, there is margin.  Hard to fully understand for me also.

I believe the exchange then sells the info to high frequency traders who front run the orders. Clearly the HFT must be making money off paying for the PFOR or they wouldn't buy it. 

Interactive brokers doesn't do this (or minimally).   

I would imagine that fees are quite a bit higher if one includes the losses from PFOF in the other discount brokers total fees.

So is there an advantage for us to trade in IB vs other retailer brokers? Unless your order is so large to tip off HFT to front run you, I'd think there is no difference trading in IB vs other retail brokers. Am i right?