What happens inside the spread?

Discussion in 'Order Execution' started by dloyer, Jul 28, 2010.

  1. dloyer


    How does a order get filled inside the spread?

    If a limit order is used, then that would move up the bid/ask and close the spread. If a market order is used, it will hit the existing bid/ask.

    Looking at the Time and Sales, there are a LOT of orders filled between bid and ask. How does that happen?

    Are these hidden orders?, dark pools, discretionary orders? Brokers offering "price improvment" and jumping ahead of resting orders? Flash trades?

    A hidden order does not move the bid/ask, otherwise it would not be hidden, so it is only on the book of one exchange unless the inside bid/ask move and it becomes marketable. Is it better to issue hidden orders on multiple exhanges to get a better chance of fill?
  2. Not so much Flash anymore but pretty much everything else you listed.
  3. dloyer


    Do you know if EDGA, EDGX still flash quotes? Last that I heard, the others stopped, but they still did.
  4. I don't know much outside of what is posted on Wiki. Maybe others will chime in. The only places that I know are still flashing are the retail shops flashing to dark pools before sending to an exchange. Other than that I don't really know - perhaps you could contact them and ask?
  5. lrm


    Are you talking about the sub-penny orders? If the spread market is 25.95 bid / 25.96 ask and you see prints at 25.959 and 25.955, for example, then you're seeing sub-penny execution. This happens because it is legal for non-displayed orders to execute at sub-penny prices. This happens on dark pools heavily, and I believe in some broker/dealer internalization.

    Here's an example: someone parks an order on a dark pool and pegs it to the ask/bid +- some nominal percent. Whenever someone queries the dark pool for liquidity they will improve the price slightly and fill it from the pegged order.

    This is frustrating to a lot of people because the level of price improvement is typically nominal and it seriously disincents public limit order traders from providing liquidity.

  6. lrm


    That's just broker/dealer internalization, not flash orders.
  7. I meant that many BDs have agreements where they will flash orders to dark pools before they route out to market - depending on the agreement, it can be for any order (even if you specify an exchange) or, most often it happens on "auto" or "smart" routed orders. BDs abuse flash and sub-penny much more than the exchanges do.
  8. lrm


    Agree, but that's not what is generally accepted as a "flash order". Just don't want to add to the confusion. When a BD fills the order prior to it entering the broader market they are internalizing it. Either by filling it themselves or letting one or more liquidity centers see and potentially fill it first.

    When an exchange receives an order and sends it to a select group of market participants for price improvement before matching it against the book then you have a flash order.

    The difference is purely relative to where the action happens. In both cases "price improevment" is required, unfortunately the regulations don't stipulate a minimum level of price improvement which leads to the sub-penny problem we have right now.

    Take care,

  9. Welcome to the basic mechanics of a dealing desk. These issues are the main differentiating factors between market making, order routing and direct access. By saying that BDs are stealing fills, your saying that they don't have right of first refusal on their own client order flow. If you don't want a BD to have that right, don't send them your order flow. That the process is not automated should reduce the shenaniganry, not increase it.
  10. d138


    To be fair it was never happening BEFORE matching against the book, but rather after failing to match on the book and before canceling it back or routing out per user insructions
    #10     Aug 20, 2010