Direct Access Brokers that will not sell your Order Flow to HFT

Discussion in 'Retail Brokers' started by MRBRETTONWOODS, Jun 25, 2012.

  1. It seems that there are only a few US-based retail brokers left that provide actual Direct-Market-Access (for equities).

    The 3 seem to be IB, Tradestation and Vision.

    For those using Penson-brokers you can more or less expect your order-flow to be sold to HFT frontrunners like Citadel, Citi and Knight.

    Don't believe me? Do a search for your broker and "Payment for Order Flow". It will tell you exactly where orders for your penson-based brokers are going.You can more or less expect to be ripped off on the spread for this reason alone.

    Although Optionsxpress is supposedly self-clearing, it has as of late been acquired by Schwab which sells client order-flow to UBS. This is an unsettling prospect for Optionsxpress clients.

    Also, Genesis Securities has recently shutdown.

    TD-Ameritrade, Etrade, etc. also sell their order flow to Knight and Citadel. This is related to Internalization.

    To be fair front-running is not only conducted on the retail level, but also on the institutional prime brokerage level to an extent. If you trade through Goldman, JPM, MS, BOA/ML, etc. you can more or less expect to be front-run, the difference is that many money managers are willing to take that risk in order to get access to better margin. That's the catch.

    For those that prefer privacy and anonymity, but can't afford a broker-neutral execution platform such as Bloomberg EMSX (Tradebook is a high-end agency broker offered by Bloomberg that apparently offers similar functionality), Reuters Trading, Fidessa, ITG, or Sungard that require 10-20 million AUM, there is always the semi-agency brokerage model. I believe that both Liquidnet and Instinet also have the same 10-20million AUM requirements.

    Prime Brokers that utilize a semi-agency model and have limited proprietary trading operations are your best bet. That means Newedge, BNY Convergex and TD Bank. Although, I believe that they require 2-3 million aum for new accounts, it is possible to still obtain access to their services through an Introducing Broker.

    So back to the retail-level, does anyone have any alternatives to the 3 retail brokers I mentioned?
  2. 1245


    Why do you feel like your harmed by using a smart routes and dark pools where the counter party is a HFT firm? This is why you get to pay under $10 per trade.
  3. bellman


    Just to clarify, if a broker is direct market access, then by definition they are not selling your orders to HFT.

    Many retail brokers offer DMA, but most make it prohibitively expensive. I thought Interactive Brokers had a order cancellation fee for DMA orders, which would disqualify the from being classified as a true DMA broker, imo.

    Lightspeed is DMA. Genesis was another. I think they both clear through Penson.

  4. What happens when the fills are worse than what you would pay to the ECN as it often is the case with these PFOF 'Brokers'?
  5. 1245


    Even with the availability of DMA, If your strategy means you're taking liquidity a high percentage of the time, a dark pool will save you money. Because of Reg NMS, I don't agree that your price in a smart route or dark pool will be worse than directing your order to an exchange.
  6. Genesis went out of business, but they were an independent broker-dealer. Lightspeed clears through Penson, though apparently they are one of the few Penson brokers that provide DMA and they also used to be an introducing broker for GS at a certain level of funds.

    I'm still concerned about Lightspeed's connection to Penson/Apex given the reputation of the later.
  7. Do you happen to trade through a retail broker that takes PFOF?

    If so I wouldn't mind hearing about it.

    Also with a typical Penson/Apex introducing broker, the liquidity you provide to a dark pool will often be compensated to them directly rather than to the client. The spread between that and the commission can be quite profitable for your broker (ahem, Ameritrade/Schwab).

    The thing is though, this type of frontrunning even occurs at the institutional level, albeit to a more limited degree.

    Are you familiar with what happened to Pipeline?

    You see at the institutional level, I can understand why former traders who have worked at BBs and know how the system works still choose to use a BB as a broker for their HF. The answer is simple: Margin. As a retail broker you're not going to be getting much margin, and you'll be getting much worse fills, regardless.
  8. 1245


    I'm very familiar with all this. I have clients at these firms. If they route to a dark pools, and the trade is executed in the dark pool, there are no ECN fees. That is a benefit. If I'm the trader, and I want to take an offer at 25.01, in a market that is 25.00/25.01, and I can save ECN fees, why would I care if the offer was Knight or some guy I don't know.
  9. So, are you a retail trader or do you work at an institution?

    Yes, that's why I brought up the ECN fees. It's not the ECN fees I'm worried about. If you're an institutional client you may save a marginal bit (depending upon the specs of the transaction) vs an exchange, but if you're a retail client of penson I don't buy it. Your broker will end up taking whatever advantage a knight/citadel/citi flash-trade might have given. With Knight buying up Penson's Futures Trading division you can only expect fills to worsen as your introducing retail broker will have less bargaining power for pricing, regardless of whether or not they want to provide the best pricing to the end-consumer. It's one thing when you're executing against Knight's order flow as an institutional client and it's another thing when you are Knight's monopoly order flow.

    I wouldn't be surprised if peak6 eventually pulls out of this new apex/penson venture and sells their shares to citadel or knight.
  10. 1245


    I guess we can agree to disagree.
    #10     Jun 25, 2012