IB Needs Better Order Execution Quality Control

IB is a great broker, and I believe its Chairman is committed to quality order execution, but some IB employees are disserving the company by preventing consistent quality control in this area. This sometimes produces such poor executions, that at least one highly liquid product, the security IWM, has, in my experience, become untradeable using SMART. My hope, for this thread, is that other IB customers will join in and encourage these employees to make quality control a priority. My single voice matters little, but perhaps other customers will add their voices to mine.

I noticed, in late April and early May, an apparent deterioration in the speed and price achieved by IB’s SMART routing of marketable orders in the security IWM, the only security I was trading. IWM is one of the most liquid ETFs, tracks the same Russell index as the ER2 futures contract, and usually has a one-penny spread during regular trading hours. I noticed my orders were sometimes taking between several seconds and 40 seconds to execute, during which time the market could move against me by 5 to 15 cents. Could it be that perhaps my experience, with this particular security, was not representative of SMART’s performance on other securities in general? I also mostly used marketable REL orders, so could it be that perhaps my experience was not representative of SMART’s performance with other types of marketable orders?

One of the worst such executions took place after a Fed announcement on 3 May 2005. My order to close a long position, by selling 100 shares of IWM, via a marketable REL order placed at 2:17:25 pm EST, took 34 seconds to execute, during which time the market moved against me by 20 cents. I started with a REL offset of 1 cent, when the spread was only one penny, and increased this offset by 1 or 2 cents every second, to ensure the order was marketable. A 34 second delay was no longer extremely unusual for SMART trading of IWM, but because the market tends to move so rapidly after a Fed announcement, the cost of the delay (20 cents) was somewhat greater than usual for delays of similar duration (usually it’s less than 15 cents). The actual execution took place on Nasdaq’s Super-Intermarket, which is labelled “CAES” by TWS. The market was bid 116.61, ask 116.62, when I first placed my order. Several hundred thousand shares executed over the next 34 seconds of delay, while the price trended down, down, down, and then, when my order finally executed at 2:17:59, on CAES, which showed the then best bid of 116.45, the price I got was 116.42, 3 cents below the CAES quoted bid. My IB-quotetracker data seems to indicate that the CAES bid did not decline, down to the price I got, until about ten seconds after my order was executed.

My IB-QT data seems to indicate that my order could have been immediately and automatically executed when it was first placed, and that this could have been done thru island, brut, caes, or arca, whichever one was at the NBBO, and that this would have yielded me a a price almost 20 cents better, and 34 seconds faster, than what I actually received. My IB-QT data shows that neither NYSE nor AMEX were at the best bid, so this was not a case of manual quotes and the trade-thru rule combining to block automatic execution. (The trade-thru rule sometimes temporarily blocks auto-execution venues from executing, until NYSE or AMEX stop displaying a quote better than the auto-ex venues). If the best bid had been on a regional exchange, to which IB lacks direct connectivity, then IB could have routed the order to that regional exchange, through either brut or arca, and gotten an immediate automatic execution.

I asked IB to explain. Their rep, at first, wrote me that the order was delayed because the best bid was on the third market (i.e., was displayed by a Nasdaq market maker). The rep seemed to say that IB was unable to execute directly against that best bid, or to trade-thru it elsewhere because of the trade-thru rule, and so my order was unavoidably delayed. He wrote, “we are looking at ways to get around this.” I responded that this doesn’t make any sense, because IB already has direct connectivity to Nasdaq, appearing as CAES on the TWS. Nasdaq and its website both assured me that NASDAQ provides immediate automatic execution of any third market (Nasdaq market maker’s) best quote (subject, of course, to restrictions like the trade-thru rule). So why couldn’t IB simply route to Nasdaq and get an automatic execution, immediately after I placed my order?

(cont'd in next post)

 

(cont's from first post in thread)

He responded with a second explanation, contradicting the first explanation. The second explanation was that the best bid had been on a regional exchange, instead of the thrid market, and that IB could neither execute against the regional quote, nor trade-thru it elsewhere because of the trade-thru rule, during the 34 second delay. I was vaguely told, “We did our best to get your order executed.” So now it sounds like they are not only changing their story, but they are also patting themselves on the back, and do not intend to take any corrective action. So I wrote back that this also doesn’t make any sense, because every regional exchange, which trades IWM, operates a website stating that it offers immediate automatic execution of any IWM quote displayed by that exchange. If IB lacked direct connectivity to the regional exchange, it could have simply routed thru ARCA or BRUT to the regional exchange, and gotten an immediate auto-execution.

Other people were able to trade hundreds of thousands of shares throughout this 34 second delay, according to my IB-QT data, so why couldn’t IB trade a measly 100 shares? I wrote that I wanted IB to indicate exactly which market center had the best bid, and exactly why IB did not route to that best bid, and why IB did not procure an immediate automatic execution. I needed this information so that I could modify my trading so as to reduce these huge execution costs. I also wanted to know if IB really understood this problem, or intended to investigate this problem, well enough even to think about fixing it. The impression I get is that nobody at IB has any idea what happened to this order, and that they couldn’t care less about investigating the problem so that IB SMART can be fixed.

The IB employee refused to provide any further explanation, information, or communication. I emailed a more senior employee on May 17, who had first referred me to the guy giving me these incomplete and contradictory explanations, but this more senior employee never responded. I sent another email, on May 20, asking this more senior employee to let me know, now, if he will ever respond at some point in the future, but he never responded to that email, either. I’m sure he will never respond. The IB Chairman wrote me a long time ago, in connection with a number of other bad executions which were never investigated, that I shouldn’t complain to him about these problems. It is my belief that he is being misled by his employees, and that if he knew the true state of affairs with IB SMART’s quality control, he would insist on some changes.

I tried asking customer service to send me official time and sales data (which is more complete and reliable than quotetracker data) for the 34 seconds of delay, but they refused to provide it, because they said it would be too much work. I repeatedly asked to speak with a supervisor, about getting time and sales, for the sake of debugging and improving IB SMART’s order routing performance. I was told that no supervisor was currently available, and that I could leave a message. None of my messages were ever returned and I was never allowed to speak with any supervisor. This disappoints me, because I would have hoped customer service would be eager to help track down bugs in IB SMART. I persuaded one customer service rep to promise to call me back and let me know if I can expect to get a call from a supervisor. I then instead got an email from this rep, making no mention of my request to speak with a supervisor. The email said that the time and sales info would be beyond the scope of services provided by IB. He wrote that I can get the info by contacting the exchange or exchanges where the security is traded. I contacted Nasdaq, at which the execution occurred, and learned that I could purchase the time and sales data for $35. I was also told that they cannot assist individual customers with questions on trades, and that I should speak to my broker or to NASD. NASD said they cannot help me get info unless I make an official complaint against my broker. They told me that if they detect a violation by my broker, my broker might be subject to disciplinary action. I asked if I could just get the info without getting my broker in trouble, but I was told that once I get an investigation in motion, I would not be able to stop any disciplinary action. I didn’t reveal that IB is my broker, and I didn’t make a complaint, because I am trying to work WITH IB to improve its order execution quality. I don’t want to get IB in trouble, or lose even more money trying to help debug IB SMART, so getting help from Nasdaq, NASD, and IB itself, were all dead ends.

It seems to me that IB should be eager to investigate what happened to this order, and eager to take remedial action to eliminate this problem for the sake of future performance. I never asked for any compensation for this incident; I asked only that IB do some quality control, so that this problem will not recur in the future, and so that IB SMART will perform better. It seems to me that IB should be eager to interact with a customer such as myself, who wants to work with IB to help improve order execution. It seems to me that IB should be eager to have a competent employee investigate the order, so that they can make IB’s executions live up to the hype on the IB website. But it appears that the reality doesn’t always mesh with the advertising. The website says:

The Smartest Trades use IB SmartRoutingSM. IB SmartRouting searches for the best firm price available at the time of your order, and seeks to immediately execute your order electronically. Unlike other smart routers, IB SmartRouting never relinquishes control of your order. It continuously evaluates fast changing market conditions and dynamically re-routes all or parts of your order to achieve optimal execution.
And elsewhere on the website I found:
IB SmartRoutingSM searches for the best price available at the time of your order, and unlike other routers, dynamically re-routes all or parts of your order to achieve optimal execution.

Hmmmmm. Can IB Smart really be optimal, given the facts I have observed? Can it really be optimal, if the commitment to learn from bugs, flaws, and mistakes is, at best, half-hearted?

I read somewhere that IB’s Timber Hill unit is now a Nasdaq market-maker. I wonder if IB might have taken the other side of my trade and bought the stock from me. I seem to recall a provision in the customer agreement, authorizing IB to take the other side of customer trades. I wonder if IB profited by delaying my order for 34 seconds, and then executing it in violation of the trade-thru rule, 3 cents below the best bid, and 20 cents below where the market was when I first placed my order. I want IB to have an incentive to provide me with good executions. I hope IB has no incentive to do the opposite. I want IB to profit directly, by the 1 cent per share commissions I pay to IB. I don’t want IB to profit much larger amounts per share, indirectly, by delaying my order. I have no way to identify my counter-party, unless I make an official complaint against IB, which I’m not willing to do. I just hope that IB does not profit by delaying execution of customer orders.

Can anybody offer me any better understanding? Am I missing something? Am I expecting too much? Could it be that IB SMART’s performance is much better on other securities, than it is on IWM? Could it be there is some issue connected with REL orders, which most people don’t use, so that other users don’t see the problems I saw? Would anybody care to add their voice to mine, by encouraging IB, thru constructive criticism, to do some quality control? Or perhaps the IB reps, who read this board, might throw some light upon the mysteries of IB SMART and its apparent lack of quality control? Or perhaps those IB reps would care to use their influence in favor of doing some quality control?

-jimrockford

 

Hey Jim, you see him to have a record of posting these
long messages slagging off IBs order execution:

http://www.elitetrader.com/vb/showthread.php?s=&threadid=32159

Which broker is paying you to post these messages?

 

I have had some problems with IB's SMART routing algorithm as well lately. I will submit orders to SMART via the API to hit a bid on ARCA and my order will be routed to ISLD instead. I have tried sending in examples of this happening to IB customer representatives who have tried to help but no solution has been found. If I route directly to ARCA I get filled. I find it ironic that IB charges me more for an API direct ECN order as compared to an API SMART routed order when SMART routing doesn't always work. For now I just eat the extra commission but it is quite irritating.

 

Businessman said:

My answer is that no broker, or anybody else, ever paid me a dime to say anything about IB. Please note that what you call my "record" includes only 2 examples, so I think it's fair to say you are guilty of a wee bit of exaggeration.

One of my previous criticisms of IB, on ET, involved the magenta order problem. This problem was eventually solved pretty much to my satisfaction, and I believe that my posting helped achieve the solution. It may also interest you to know, businessman, that my efforts have produced very many improvements and bug fixes in IB's order execution logic. Many of these good results are invisible to users, but some of them are highly visible. It was my efforts, my arguments, and my detailed analysis and investigation of individual order executions, that persuaded IB to allow us to exclude AMEX from SMART. And then, later on, I persuaded them to let us exclude NYSE from SMART. More recently, I suggested, and they implemented, a new feature, currently in beta, which lets us exclude non-auto-ex quotes from SMART. So when DIRECTX is on, SMART can route to NYSE, but when DIRECTX is off, SMART routes elsewhere, and this way, we can avoid the specialist.

I spent the time, on helping to improve IB order execution, because I see so much of value at IB, that I think IB is worth the effort. I think the new spread functionality is really quite an amazing, and quite an underappreciated direction, for example. Sometimes, I think IB tries to do too much, and it loses sight of its core mission, which is to get the order execution right. I think that we, as IB customers, sometimes need to remind them to get Job # 1, order execution, done right before they spend too much time on bells and whistles and charts and backfill and new products.

Personal attacks are easy, but there is more work involved if you want to be constructive in your criticism.

I would also like to say that I feel confident that Businessman was not paid by IB to post that nasty message. I think IB has too much class for that sort of thing. I think Businessman wrote what he wrote because that's just who he is.

 

Jim,

I've also had issues with smart and nasdaq routing. Its just not as lightning quick as it used to be. One explanation I got from IB support was that cancellations were taking longer to come back, so that was holding the smart routing up. Personally, I suspect something with the IB order servers. In any case, they don't seem to be in a hurry to fix it.

If you can afford it, I suggest you look to open a prime brokerage account. Thats what I'm in the process of doing.

http://www.elitetrader.com/vb/showthread.php?s=&postid=752522#post752522

 

Your message is way too long. Any complaint that takes that many words to express, is probably misinformed.

Now, to the point. The best quotes on IWM are not always real. You should know that. AMEX blows. CAES should be ok, if there's not an order ahead. NYSE not bad. You are trading against hedge funds with 10 ms turnaround. Your pitiful DSL or cable connection is no match,

I'll help you out. If you want to get a fast fill, direct to an ecn. Smart should work, but only if it is not 'deceived' by a stale quote. If you aren't getting filled then, it's because your quotes are lagged, and you are pi**ing in the wind.

 

How are your ECN and Supersoes fills fills? They should be immediate.

 

Guess no one wants to deal with reality. Better to complain about nothing.

 

stock777 said:

Well, thanks for the effort to help, stock777, but I think you are misinformed on a few points.

I know my posting was very long, but if you read it, you will find that it has already been established that neither AMEX nor NYSE were at the inside bid, so that a stale manual quote could not have deceived SMART into delaying my order. If there was a stale automatic quote, then this is something that should be investigated and fixed, rather than ignored and neglected, and if it were established, it might absolve IB of blame. I have analyzed very many delays and failures of order execution by IB SMART, and I never once saw a case where a stale automatic quote deceived SMART, but I saw many cases where IB SMART had a bug. IB has also stated that it did NOT route to the best quote, so this again, if true, eliminates your theory from consideration.


It is also clear that lagging of my quotes could not have been the problem. My IB TWS audit trails prove that my order was marketable and received by IB and in a working state at IB for 34 seconds of delay, during which it did not execute. So there is no way that any lag of my quotes or my DSL connection could have anything to do with the delay. It is possible that my IB-QT data was lagged while it was being collected, and that this data might have distorted my analysis of the trade, and this is partly why I have requested time and sales data from IB. But IB refuses to provide time and sales. The important thing is that there is no way any lag of quotes or DSL could have delayed my order for 34 seconds after it was received by IB.

You say:

But Nasdaq promises immediate automatic execution, in which case stock ahead should never delay IB SMART by more than the fraction of a second it takes to re-route to the new best bid, immediately after stock ahead takes away the old best bid at CAES (assuming that the new best bid is an automatic quote, as it was here, rather than a manual quote).

You say:

I don't see how you can call this a fast fill. If you route to an ecn which is not at the NBBO, or which appears to be at the NBBO but is not at the NBBO when your order arrives a fraction of a second later, then you won't get any fill, on IWM, until your ECN returns to the NBBO. This means you will get poor fills. You must instead take the time to eyeball the quotes, and to choose the best ECN manually. But this manual mental process means substantial delay, which will be costly when the markets are moving.

Another problem is that sometimes, during the delay required to perform this mental process, the best quote changes from your ECN to some other, so that now,
you are routing to the wrong destination, and you will not get a fast fill at all.

Another problem is that some IB order types, such as REL orders, are not offered as direct-routed orders. Another problem is that IB does not automatically reprice direct-routed marketable limit orders, so that if the market moves away from your direct-routed order's limit price, during one of the various delays resulting from direct-routing, then you won't get any execution at all. If you compensate by using a direct-routed limit order, very aggressively priced beyond the opposing NBBO, then you will run into other problems. ARCA will simply reject such orders. ISLAND will re-price them to the NBBO, but if ISLAND fails to provide an immediate execution at the NBBO, and then the market runs away from the NBBO, then ISLAND will simply leave your order at the former NBBO, while the market runs away, without any hope of your order executing. YOu can some of these problems by using a direct-routed market order, rather than a limit order, so that IB will automatically re-price your order. But you will then risk getting occasional, extremely costly bad fills, when the market spikes against you. I have also found that due to bugs in IB's automatic repricing algorithm, I have sometimes experienced extremely long delays and poor fills. Direct-routed market orders have shared some of the same problems as SMART-routed orders.

You say:

I'm not sure what you mean by this.This is the 21st-century. All brokers should provide all customers with intelligent routing software, and they should perform quality control. This is part of the broker's obligation to provide best execution. I fear that the reality is that no broker will actually do this. Whatever IB's shortcomings, in this respect, I'm not optimistic that there is any other broker that is any better than IB in this respect.

I think we, the customers, need to request truly intelligent order routing. I think we probably have better chances for success in doing asking this of IB, than we would have with any other broker. Note that I am simultaneously criticizing and complementing IB. But I am disappointed by the underwhelming response to this thread's topic. I really thought more people would care. Maybe IB will never provide what I seek, because customers generally are too misinformed to demand it or to appreciate it. Maybe they care more about charting and backfill than they do about execution costs. Very disappointing.