Beware these b/d's

Never open an account with a b/d where the directors/principals finance their own buyside desk, or run market making algos alongside their main customer business.

I can name a few who don't such as IB and MFGlobal.

 

You've got that right! I've been prop trading for only 3 weeks now and can honestly tell you that these boys don't make their money from the split. They make their money from trading against you.

How else are they gonna pay the bills?

 

I am confused by something here, maybe you guys can explain it to me. The bid is say 50.00 x 50.01 on a stock. You want to short it. Your B/D has a contract with you that if they can match or beat the NBBO, they can fill you internally.

I don't get why you care whether this gets filled at whoever is bidding 50.00, or with the B/D that fills you at 50.00.

I do agree with one thing, internalization does reduce volatility in share prices, so if you are talking _buying_ options I would be more intent on agreeing. But equities

 

Internal cross is fine as long as b/d is not engaged in their own proprietary trading activity alongside customer accounts. B/D's to avoid are those that do simultaneously.

 

WHY?

 

How does one know if the b/d finances their own buyside desk? Thanks.

 

Ever hear of ethics?

I won't name any names but there are prop firms and clearing firms which front run profitable customer/trader strategies, and also trade against. These are the two main HFT strategies. Front run and stop out customers.

Crazy thing is they even use customer deposits to leverage their own prop activity against them.

 

Some B/D's explicitly state that they do not engage in their own proprietary trading.

Rule of thumb is if it's a prop firm, and this firm accepts customer deposits and also backs traders too, red flag.

If it's a retail firm or money up prop, it's as simple as asking whoever you are speaking to if he trades within the b/d.

It isn't illegal to do so, but why bother with the scum?

 

Ah, ok. If that is the case, then that is far worse than ethics, it it downright illegal and criminal.

But, __assuming__ you were getting the NBBO, would you have any objections? BTW, I think internalization is aweful, but not because I think it is illegal or unethical. I think it is less transparent than sending an order to an exchange, and more likely to be taken advantage of. Otherwise, I couldn't care less who fills me as long as the price is equal to or better than the NBBO. Granted, I understand you don't believe that is the case...

 

Would you object to your broker frontrunning you 10x your position at NBBO?