IB directed orders and conflict of interest

Discussion in 'Order Execution' started by adamant, Jul 12, 2013.

  1. adamant


    Why do interactive brokers charge more for directed orders? Not just a little more, but *double* the commission, and no exchange rebates available.

    It is clearly less work for them to simply send an order straight through to an exchange, rather than processing it themselves.

    Therefore there *has* to be a profit motive for IB in effectively forcing clients to use SMART. This is a fact.

    There are two ways I can think of that they profit from SMART:

    1) They can internalize order flow and cherry pick fills. I always used to think this was the reason, but as far as I remember IB vehemently deny that this is what they do (now at least).

    2) A very helpful friend at an investment firm suggested a different reason. Exchanges offer discounts for submitting a batch of orders in large volume. Apparently above a certain volume threshold on certain exchange charges may be wavied entirely on additional lots. This would mean that IB would profit from grouping client orders together and submitting them in one batch. The upshot of this is that the longer IB delays your order, the more other client orders it will be grouped with, and the less IB will pay. I don't need to tell anyone how meaningful microseconds let alone tens or hunderds of milliseconds in today's markets, and what a clear opposition to client interests delaying orders represents.

    I have been running automated strategies for a while now with IB and I have a server hosted in New Jersey 2 milliseconds from them, but I am much less than happy with the way SMART has been behaving.

    Does anyone have any further light to shed on this? Perhaps someone from IB enlighten me as to which of the above are true, or another reason I haven't thought of, for why simpler directed orders cost more than double SMART orders?
  2. sprstpd


    Are you talking API orders or manual orders? Because manual direct orders cost the same as SMART orders.
  3. sprstpd


    Sorry, maybe my comment doesn't apply - I use the bundled commissions setting.
  4. adamant


    Hi sprstpd,

    API orders, but yes I was referring to the unbundled commissions option not being available.

    "Please note that directed API orders cannot use the Cost Plus fee structure. Smart-routed API orders can use either the Cost Plus or Flat Rate structure."

    What is the rationale for this if not to profit IB?
  5. Bob111


    bundled or not-there is some extra charge for order to particular exchange via API(which will be credited back,if you are filled)
  6. Bob111


    well..you have to understand one thing-it's ain't charity. everyone out there is for profit. :)

    and rules are very simple-take it or leave it
  7. nitro


    This is the primary reason I no longer use IB.
  8. sprstpd


    I believe the SMART routing reduces costs to IB because if it has a choice of where to route, it will route to the least expensive center. If you choose to use SMART routing, then they choose to pass some of those savings to you. Or at least I think that is the general idea.
  9. adamant


    But that's my problem. The rules aren't simple.

    The commission structure is clear enough.

    The routing structure is as clear as bricked up window.

    I am beginning to think that the SMART, while it seems cheap, is actually costing many users more than they would be paying using directed orders in failing to hit exchanges, loss of queue position in the order book, and limit orders mysteriously executing as market orders with no rebate.

    When you think of it in those terms, IB suddenly goes from an apparently cheap to a very expensive option.
  10. adamant


    Hi nitro,

    Can I ask who you are using instead and whether you would recommend them?

    #10     Jul 12, 2013