http://www.interactivebrokers.com/en/general/about/commentLetters.php?ib_entity=llc Interesting speech OldTrader
"It should be shocking, but it probably is not, that according to the Rule 606 reports mandated by the U.S. Securities and Exchange Commission, no major online broker, with the sole exception of Interactive Brokers, sent more than 5% of its orders to an organized exchange. More than 95% of their orders go to internalizers!" I've been searching for some data to support this, because it doesn't add up. There are quite a few ECNs around: are they not considered 'major' online brokers or are they (ECNs) able to internalize their orders (which would be very bad). Because if Peterffy is comparing IB to Fidelity, Ameritrade, and E-trade, then its just marketing BS. But if there is substance to this claim then it is shocking.
I think it's clear he's referring to "major online brokers", which would be Fidelity, Ameritrade, and ETrade. Not sure why you think this is "just marketing"....perhaps you could illustrate your logic by referring to the Rule 606 reports, which is what Peterffy is referring to. OldTrader
I think he answers the question of how Goldman Sachs makes a hundred million dollars a day, every day. The massive public pension funds, for instance, get sold derivatives to hedge their portfolios at terrible prices. The pension fund employees who are in contact with Goldman Sachs, get the expensive dinners, Cuban cigars, and other unmentionable favors stated by Peterffy, from Goldman and the other brokers. The salesmen go back, and tell the 80-year old unsophisticated board members of the pension fund that this is the best method to hedge their portfolios. Sub-par performance at the pension fund is then swallowed whole by firefighters, teachers, etc. It's the same old story, find a powerless or unsophisticated member of the public to fleece. The "cops on the beat" - regulators and elected officials, are also feeding at the trough. It benefits NONE of the insiders to stop the game. Rinse and repeat millions of times a day = 41 million people on food stamps.
Just two more thoughts. The above is why Wikileaks is so exciting. Telling the story from the inside of the game is what is absolutely forbidden. Wikileaks exploits this vulnerability. (for example, Wikileaks has "very sensitive" BP spill docs). Secondly, whistleblower rewards are threatening because they also expose the game from the inside. But, financial whistleblower rewards were most opposed by - you guessed it - the SEC.
I don't see Wikileaks as necessary for this case (or for anything, for that matter). What Peterffy spoke about is no secret. Order internalization has a far bigger impact on pricing efficiency and transparency than flash orders; yet anti-flash coverage got tons of hype in the media. For probably a plethora of reasons, the stories that make it into purview of the media/blogosphere/etc. seem pretty arbitrary.
I think he is referring to all brokers in general whether online or not. Selling of order flow has been a common practice for several years. For brokers like IB that claims to beat the NBBO, most of the time by sub-pennies, where are they transacting their trades? It cannot be on an 'open' exchange. Who is the contra party? The NYSE use to have a rule that members could not transact listed securities away from the exchange. Now most trades are 'crossed' in house or sold to a marketmaker. There is no 'centralized' market or transparency. The public is being sucker punch every day by brokers while the regulators look on with a blind eye.
<i>Market makers, not so much in stocks as in options, must maintain tens of thousands or hundreds of thousands of quotes at the exchanges, and when some input makes them move those quotes they must move them in a matter of milliseconds. On the opposite side, we have High Frequency Traders who are waiting for just such an input signal to quickly grab those quotes that have not yet been moved. This is not an even playing field. It obviously takes much longer for the market maker to move thousands of quotes than for the HFT to hit a handful.</i> <i>If you want to have market makers you should give them some modest preferential access. Hold every order for a tenth of a second with the exception of market maker quote updates for products in which the market maker is registered and has affirmative obligations. There is simply no other measure that can protect market makers against being picked off. If you do not do this, market makers will either make wide markets or just cease to be registered as market makers.</i> I have to say I agree with this. I can not see any benefit to the public or greater efficiency in the market when HFTs see a stock price spike up or down and then immediately buy a call or put a millisecond before the market maker has a chance to adjust the price. Inevitably market makers will have to respond to this by widening bid/ask spreads or getting out of the market altogether. The losers are retail option traders and institutions who will face worse prices and less liquidity.
Thomas Peterffy has to be one of the most underrated trading geniouses alive. How he can consistently make markets on 300,000 symbols and make money is beyond me. His views on internalization are bang on. Having someone sub penny the NBBO is not price discovery, and will lead to flash crashes and liquidity lapses just like he says. He should run the SEC.
the old timers have made all the easy money. It will be much tougher going forward in the algo world.