when you place an order with a prop ( can't say all but with reputable ones) your order goes directly to the source whereas with a BD it goes to them then gets redirected....
So I gather that direct access gives you faster fills? I'm coming from a futures background so there are a few things that are still new to me here
Dealmaker, Each broker is different. We offer institutional customer accounts. We offer Broker Neutral platforms and connect them to DMA routes that we have relationships with. These orders do not go through a dark pool or to a group of market makers. In the end, that should not be the deciding factor in choosing to go into business for a year or more with a Broker Dealer as a LP or open a customer account. The decision to join a prop firm and which one you choose, is a difficult business decision. Customer accounts can be closed at anytime. LP agreements are very binding. Bob
It's not about speed, most of the time. It's about control. It's about access to maker/taker fees or the avoidance of them.
There are something like ~100 "trading venues", most of which are dark pools. Most brokerage houses run their own. So if I want to buy 100 XYZ and you want to sell 100 XYZ and we're in the same brokerage, if we both smart route, the order will fill without ever leaving the brokerage. The venues are all different, but it gets into the fees they charge or rebates they pay. Most pay for limit orders (adding liquidity) and charge for market orders (removing liquidity). Especially for high volume HFT-esque operations that stuff can make a huge difference. So with IB you can either choose to smart route and pay a flat fee, and IB will route in a way that is probably equal in speed (maybe faster if they can match internally), or you can take total control and go the DMA route, specifying which venues you want to place what orders in. The trading venue topology is complex but understandable. I spent a few days on a whiteboard and finally figured it out well enough that I can make good decisions on when to smart route, and when to use DMA, and then from there what venues are appropriate to the order type. Adding on: If you're making a couple of dozen orders a day this probably doesn't matter. If you make hundreds or thousands and move millions of shares, it's crucial.
Thanks Risk619, to be frank this whole 'exchange routing' thing is probably going to take some whiteboard time for me as well, lol. It's so simple with futures, just one centralized exchange and DOM with no decisions to make. Here it's like a dozen little exchanges, ARCA, BATS, NASDAQ, etc. And what I don't like here is that you have to think about this stuff when you're trading, which I'm imagining can be a distraction. But I guess it's important to learn!
If you get a chance, check out Flash Boys by Michael Lewis. It's not really 100% accurate, but it definitely introduces a lot of the terms and the overall topology. He makes HFT's out to be evil villains which really isn't true, but it's a pretty easy read and at least shows some of the dark sides associated with it. It will help a lot when you look at data feeds as well, because dark pools are required by FINRA to report their transactions, but with a ~10 second delay. So if you want the "market price" you'll want to exclude all of those "alternate trading venues" and only use "lit pools". In defense of Knight Capital and Citadel, they're pretty much always there as (official or not) market makers, providing some degree of liquidity across all US equities. The real nasty stuff is when houses collude with them (which is discussed in Lewis' book).
Thanks, I'm going to try to find a more 101 level practical tutorial on this stuff. I need to make sure I have a solid decision making algorithm for this stuff so I have one less thing distracting me when making trades.