It's been a while since I posted anything here, but this holiday zombie market has me wondering how to fill the time. So, let's talk about routing. It's an area that most new traders don't focus on, or realize the importance of. A good routing strategy is an integral part of your overall trading plan. Liquidity: To add or to take The most basic variable is to add or take. If you are trading thick stocks like F, BAC, then adding requires a lot of patience and you're competing against the rebate capture algos. If you get a fill, it means you are probably wrong on direction in the near term. Depending on your trade horizon that may be ok. If, like me, you are trading more volatile stocks with 2-10c spreads then it's not as hard to be patient and add so long as the stock isn't ripping. I have two main routes (more on this later), one for adding, and one for taking. For slower moving stocks, I always try to add. For fast stocks, I take when necessary, often through multiple levels. A quick look at the math, and why you should always add when possible: XYZ 20.00x20.01 If you add 500 at $20.00 you have saved yourself a penny ($5) plus gained the rebate (500x.2=$1). At a .3 commission the trade cost you appx $.50. If you take 500 at $20.01 you have paid a penny ($5) and paid the fee of (500x.3=-$1.50). At a .3 commission the trade cost you appx $3. That's $2.50 ($3-$.50) plus the $5 spread capture for a total of $7.50 if my math is right. When you are adding with wider spread stocks, the numbers increase significantly. Do that all day and you can be looking at $150-300+ in savings per day, and that really adds up over the course of the year. This is a business and you should always be looking to reduce costs. Besides the cost factor to fills, there's also the psychological factor. By getting a better price, you now have a better stop and can stay in the trade longer. If, like me, you usually add when a trade goes against you, a better price also allows you to get bigger than you would have otherwise. Don't underestimate the advantage of good fills, this is a very important aspect to my trading. What routes should I use? As I mentioned above, I primarily use only two routes. For adding: There are a few ways to handle this. The goal is to have the least impact on the L2, but be displayed to capture the rebate. If you want a full rebate with a basic NSDQ/ARCA/BATS limit order, then just display 100 and pick your price. That's the most simple, but it has more impact on L2 (hft/front runners). The next is a primary peg with NSDQ/ARCA/BATS. This means, if you want to buy, you enter your limit price and it will add your order to the bid anywhere at or below your limit. Always only display 100. The goal is to capture the full rebate, and possibly get price improvement better than your limit price. This still has some impact, and occasionally hft will sniff out your order limit and fill you there. You still got your fill at a price you were willing to pay, and captured the rebate. The last, and what I use, is a primary peg with BATY. This works the same as above, but it has an inverted pricing model so it often gets taken first. You are more likely to get a fill, but you don't get a rebate. I'm willing to give that up because the price improvement and fill rate is more important to me in the types of stocks I trade. I didn't touch on midpoints, although those are definitely an option for some strategies. There are obviously many more routes, and maybe you guys have some ideas that we can learn from. For taking: Since the advent of hft, taking liquidity has become much more difficult when using basic routes. If you are a small trader (100-200 shares) then it won't make a difference, but for any more than that you need to be able to take liq quickly before hft can cancel or front run. Many brokers offer a smart router, but beware as those don't usually account for these issues. They are a tool for your broker to collect fees and commissions. They often take the inverted ecn's first, thereby collecting the fee, and also charging you an extra fee on top of your commission. The fills are poor and expensive. Also, some shadier prop brokers give a look to a third party in exchange for a fee. If you are at one of these brokers, it's not a bad time to go somewhere reputable like Lightspeed or IB. For a few years I used a PDQ router, which was the best at the time. That was before IEX, which is now the best out there for the average guy. Their fill rate on taking is something like 96% which is also my experience. The delay they built in keeps the hft from cancelling or front running, and it really works. Often times you can even tell they didn't want the fill, and they scramble to immediately cover. I'm talking about the IEX smart router, not their normal route. I use lightspeed and to set it up you create a custom order with IEXG hidden as the route. I'm not sure how to do it at other brokers. https://www.iextrading.com/trading/router/ That's all I have for now. I'd love to hear any ideas on how to improve on my suggestions, or any questions.
Why do HFTs even go thru IEX? Is it because they have to, having been routed from another exchange to get NBBO?
Concern with maker/taker fees is very reasonable, but for certain traders/portfolio managers, trying to save 30 mil vs getting 20 mils is not constructive if they don't get their size and the stock moves.
I agree, but in most cases traders aren't top or bottom ticking the move and would be better off waiting for a fill.
I want to make it clear that I have not been a professional trader for over 6 years. My current trading is very small and I don't care about the fee. It is not material at my volume and I'm not scaping. For most of my customers, I can offer them both a SMART route and DMA, and they can manage their trading and fees that way. The option SMART routes avoids maker/taker fees for equity options and we have some SMART equity routes that you don't pay them and some where you pay a reduced fee. We offer a lot of platforms and a lot of routes and not everyone of them is available on every platfrom.
I've used the LSPT routes, but they can't match the fill rates of IEX although they are a little cheaper.
We offer IEX. This is what is avaible for Lightspeed Trader https://www.lightspeed.com/pricing/routing-fees/