Consent to Take the Other Side of Orders?

I was recently opening an account with a futures broker and when I was reading through the find print, i saw this:

Consent to Take the Other Side of Orders - Without its prior notice, Customer agrees that (i) "Broker" may engage in pre-execution communications in accordance with applicable rules and regulations relating to electronic trading and the execution of electronic orders; and (ii) when "Broker" executes sell or buy orders on Customer’s behalf, "Broker", its directors, officers, employees, agents, affiliates, and any floor broker or terminal operator may take the other side of Customer’s order for the account of such person subject to such order being executed in accordance with and subject to the limitations and conditions, if any, contained in applicable rules and regulations.

Can anyone clarify this?

 

this sound like something that would be in a bucketshop agreement.

I thought the broker always has to pass the trades onto the exchange?

 

Which broker is this?

 

I checked at several very popular brokers/clearing firms and they all have that clause.

 

I worked in regulatory compliance in government for 15 years though not in the financial/ trading industry. My guess is there is a regulation which states that a broker (and its officers, agents, employees, etc...) may not take the other side of a trade without disclosing same and having customer acknowledge understanding that it may occur. It does not mean they will take the other side. They likely put it in there in case there ever is an allegation then they're covered. Their general counsel probably advised them to put it in there.

 

That is not what the wording implies.

This states the way I understand it, that anyone that works for the broker can take the other side of the trade!

Also I would like to know what "pre-execution communications" means? That sounds very suspect because it is not in reference to the client!

 

Are you directing the trades yourself? If so, not sure why you even care.

The may have a prop shop that is trading. So orders, orders, orders... coming through their prop desk. and here comes your tiny little order. and it just happens that your counter party is your broker. Do you really care who it is? You get filled at the price you want - that is the thing you need to be concerned about. Slippage. Now if they hold that order for 200ms so that their prop desk can move the market against you, then that's fraud. But for a 1-20lot order, I doubt they would risk the exposure to market condition to make a tick on you.

 

Even if they have a prop shop that is trading doesn't the order get sent to the exchange and then the order matching algorithm at the exchanges matches the buys and sells?

 

Unless they cross the order and report the fill as an OTC.

 

Clause 1 about "pre-execution communication" is pretty common. Whith stocks it's common that there is more than one execution venue. So, the broker may offer to check every exchange where the stock is trading for the better price before actually sending a client's order.

Clause 2 is way more suspicious. Not only the list of potential "enforced" counterparts in the trade that is too long... but also whenever a trade is executed internally, th e trader is missing the premium from the exchange for adding liquidity.

If the OP's trading approach relies on receiving premium for "adding liquidity", the OP should steer clear of any broker that makes money by preventing OP from receiving such a premium.