Filling Orders?!

Discussion in 'Order Execution' started by cigarno, May 6, 2010.

  1. cigarno


    Legally speaking, when a customer places an order with a stock broker to buy Citibank stock for say 4$ and another customer of the same broker places an order to sell Citibank stock at 4$.

    Can the stock broker match the two customers together? Or both orders has to be routed to the stock market to be filled by other customers?
  2. Occam


    Not only that, but the broker can trade with the customer themselves; so if one customer puts in an order to sell at $4, then they can fill it at $4.0001 (I am not kidding), then if/when a second customer wants to buy at 4.01, they can fill it at 4.0099, for a profit of .0098. Obviously, this has some adverse impact on price discovery and efficient markets.

    This practice is called "broker dealer internalization", and is quite common, unfortunately, and is on the rise. Some stocks now have as much as 80% of their volume never seeing a true stock market.

    One way to one's orders being internalized is to route all orders explicitly to an exchange, but note that some brokers charge extra for this.

    See also this site covering related issues that someone from Bright set up:
  3. cigarno


    Than You Occam,,,,,
    The math in your example is not correct. I guess you meant if you place an order to buy at 4.0001 then they can fill it at 4.0099 for a profit of .0098.
    At any rate, if you place an order to buy at 4.0001 can they fill at 4,0099 or they must have absolutely fill you 4.0001?
  4. rosy2


    internal crossing networks are great for banks/brokerages. you even see that citadel, getco, wolverine, atd, also have execution services that they can take advantage of
  5. Occam


    I think my math is correct; apparently, I didn't explain in enough depth what's going on :D

    You, as a regular client, can't place an order at 4.0001 (unless, possibly, you're an institution with dark pool access), but your brokerage can cross one at that price if you're their client placing a buy at 4.00, and then they can call it "price improvement" (a whole 1c in your favor on a 100sh order -- YEE-HAW :D).

    As an aside, if I understand this correctly, I think that "price improvement" may preclude you from getting a better price (say 4.01) from a non-displayed order on actual exchange, so the "price improvement" might have cost you $3.99 per 100 shares, and yet your brokerage gets to crow about how they "saved" you 1c.
  6. cigarno


    Thank you for the explanation.
    If you place a limit order to sell at 4$. Can your broker fill your order at 3.99$?
  7. Occam