Is "Smart" order routing a sucker's play (for either fees or execution?)

Discussion in 'Options' started by d0rian, Nov 13, 2019.

  1. d0rian


    TLDR: I've always used IB's default "Smart-routing" for my orders.
    1. Does that end up costing me more in fees?
    2. Why does Volume seem to trade at my Limit (to other people) even when I was the first to submit an order at that price, and how can I configure my order routing to ensure my first-in-line priority?
    1) Fees: I recently looked into just how much I'm paying in fees and it's not pretty (high 5-figures). 99% of my trading is in Options, and IB's own commission schedule doesn't seem to be the culprit (or at least I'm not sure there's a cheaper alternative than their $0.25-$0.70 / contract), but the exchange fees really add up (sometimes even exceeding IB's trade commission >> aka more than doubling the fee to me.) Each exchange has its own fee schedule (see "Exchange Fees" in page linked to above), some with better maker-taker incentives than others (anecdotally I've noticed the "BOX" ECN fees to be really high). I've never changed IB's default "Smart-Routing" setting, but in the interest of taking the next step in in my options education, is there some routing strategy I can look into that will bring my fees down?

    2) Execution: I often observe the maddening phenomenon of putting in the best Bid or Ask (between the displayed spread), and then watching orders go through at my Limit price, except I'm not getting any of them (despite ostensibly being "first in line" at that price.) Someone told me that was due to the fragmented nature of the various options exchanges and that while I may be seeing Volume go through, it may be at other exchanges where my order isn't listed (which I didn't understand; doesn't Smart-routing essentially send my order to all available markets?). He also hinted that no experienced traders use the default "Smart"-routing, which he characterized as a sucker's bet for retail noobs. Is that true? Where can I start learning about how to optimize my routing game? At the end of the day, if a given spread is $0.05 / $0.15, I just want to be sure that if I put in an order at $0.10, I'll be first in line to get filled if someone wants to trade at that price.
  2. tommcginnis


    Your "friend" is no friend.
    1) Fees: If you're spending "high-5-figures" and are asking these questions, your method needs serious help -- blaming IB or an exchange will do you $zero good.
    2) Execution: Spend some time with BookTrader on the rapidly-moving ES. Place an order to buy (or sell) and let the market hit that price. Watch how long it takes until you get hit. Compare that to two figures that you've posted in the dashboard: trades/minute and volume/minute. In rough numbers, if there are 750 contracts on the price at which you've put a order, and there are maybe 500 contracts going through, then you've got 90 seconds before your last-in-line order gets onion-peeled to the top of the heap. And for every moment that price trades away from your order, you need to stop that countdown clock. This is how a market moves in a smooth market. In the individual market for options by strike or by spread, things be a *whole* lot lumpier. Still, put up a BookTrader page and stare at it. (Always. Every day. Every FED announcement. Every ECB announcement. Every.....)
    TooEffingOld and ironchef like this.
  3. FSU


    When you enter an option spread it is generally routed to a specific exchanges COB (complex order book). There is no guarantee against trade throughs on spreads from another exchange, so if you are at .50 on the CBOE, it may trade at .55 on the PHLX. You may or may not be first in line on that specific exchange, depending on the exchange or product. For example, the orders may be "pro rata" or "first in" If pro rata your fill will be based on the size you offer, not first in, for example, if you are at .50 for 10 spreads and another trader is at .50 for 50 spreads, he will get more of a share if someone pays .50.

    Smart routing doesn't send orders to all markets as you suggest. For my platform I have two different types of "smart" choices, one based on fastest fills, one based on most rebates. I'm not sure what IB takes into account on their smart routing.

    The problem with routing to the exchanges that provide the best rebates, and hence would reduce your commissions, is you may be less likely to be filled, or be filled at worst prices. I will generally send a 1 lot spread to the CBOE, and then try other exchanges that provide a rebate at the price I was filled at on the CBOE. Sometimes I will be filled on the other exchanges, but most times not.
    tommcginnis and guru like this.
  4. taowave


    .25-.75 per contract was never my all in price with IB.Much closer to 1.15 and every dam time I traded some 4 legged monster I wound up paying close to 6.00...

    Yes,if I supplied liquidity I would usually get cheaper rates on spreads,but that's a double edge sword as no one would hit my bid,and if I pulled it,my bid instantaneously became the offer.

    I opened up a second account at TOS and am charged .65 per contract all in...

    I can lift offers ,hit bids and come out ahead on price due to the zero commissions..

    No brainer so far:)

    qlai, TooEffingOld and ironchef like this.
  5. Until now I never knew about booktrader.

    This is mesmerizing!
    tommcginnis likes this.
  6. ironchef


    If your profit is high 6 figures or 7 figures, you shouldn't care. If not, you overtraded or have no edge.

    When I started back in 2013, sold OTM short duration covered calls, hundreds every month for six months. Broker made 5 figures commissions on me and I netted a loss (compared to buy and hold).
    TooEffingOld and taowave like this.
  7. Well I've handed TD/TOS 5 figures for commissions.........even with all in pricing...
  8. qlai


    Sorry, what did you mean by that?
  9. taowave


    More often than not when I bid on a spread,the "seller" (offer)typically does not hit my bid.But as soon as I pull my bid,the the offer is immediately lowered to the level I was bidding..

    If the market is 17 bid at 20,and I bid 19,I am rarely filled.As soon as I cancel my bid(or lower it) the seller immediately lowers his offer to 19..IB said it's due to traders wanting to supply liquidity and get a rebate on commision...

    Seems silly,but when I traded tight flys,6 bucks in and 6 bucks out was too high a percentage of my expected(hopeful) profit..

  10. qlai


    Oh, so no one wants to be liquidity taker I guess. Why don't you lift his offer when it's lowered to the price you wanted?
    #10     Nov 13, 2019