Q&A
Since You Asked
Confused about some aspect of trading? Professional trader Don Bright of Bright Trading (www.stocktrading.com), an equity trading corporation, answers a few of your questions. To submit a question, post it on the Stocks & Commodities website Message-Boards. Answers will be posted there, and selected questions will appear in future issues of S&C.
ROUTING AND REROUTING FEES?
Don, I have a question about order routing that perhaps you can help me with. I trade with a respectable brokerage that caters to active traders. I’ve noticed in the last few months that I have been charged fees referring to “routing,” “rerouting,” and electronic communications networks (Ecn) fees. I place my orders to go to the Nyse, as suggested by my peers. I am told that there may be fees for taking of liquidity, and also that I may be entitled to collect rebates for providing of liquidity. I’m not sure what any of this means, but now that I’m being charged fees, I would like to understand it better. When I called the broker, they were very vague about it all, as if they weren’t sure either, but assured me that they were pass-through fees, not add-ons. Can you help? — oldtimeguy
Excellent questions, very timely. Although I can’t speak directly as to how your brokerage handles such electronic orders, I can explain how things work. If you submit a limit order to the Nyse (as you say) to buy Xyz for $20.10, and the Nyse’s best offer is $20.11, but the overall best market (Nbbo, or “national best bid and offer”) is $20.10 on an Ecn “market center” like Arca. The Nms (that is, the National Market System) requires that the Nyse “ship” the order to the better-priced market. That’s great, except the Nyse will likely charge you a fee for “shipping” the order out. These fees are usually about three-tenths of a penny per share, which can add up quickly.
You should have the option to designate your Nyse order as Dns (“do not ship”), which would stop this extra pricing. However, be careful what you wish for, and be sure about what you’re asking them to do. You should be shipped out only if you’re saving yourself a full penny while being charged a small percentage of a penny.
Now, about providing or taking liquidity. The Ecns will pay you a rebate if you leave a limit order with them and another order comes in and hits it. Conversely, they will charge you if you take liquidity by hitting a bid or taking out an offer immediately. A rule of thumb is that you will receive $0.002 and pay $0.003. Be very careful with this. Because of flash orders and subpennying, you might stay parked with a $20.10 bid forever, while the stock continues to trade at $20.10001 (a subpenny in front of your $20.10 bid). Set your price ticker to reflect several decimal points if allowed to do so.
This may sound complicated and full of jargon, but please strive to understand this fully and ask questions of your broker; otherwise, this can be very costly. Most of this has changed considerably in the last two years.
DOWN THE ROAD, ANY IMPROVEMENTS?
Don, I read your columns about the impact of flash orders and subpennying with a lot of interest. I went to the website www.defendtrading.com as you suggested. What are your thoughts now, a few months after the flash crash and all the debates? Do you see any improvements coming down the pike? — Eqtprof
Thanks for reading, and thanks for your interest. As you’re probably aware, I’m responding around Thanksgiving 2010, and this will be published in January 2011. Feel free to check the above-mentioned site or mine at www.stocktrading.com/Tradinginfo.htm for updates.
Now to what we have been seeing currently. As discussed, my brother and a small contingent from our firm and others testified in front of Sec about how flash trading and subpennying harm the markets and public by taking away incentives for market participants to place and leave in limit orders. Well, it appears that the officials at Nyse Euronext, on behalf of its subsidiary options exchanges, Nyse Arca, and Nyse Amex, have seen the impact of these activities as well.
In a recent mailing to the Sec (Elizabeth M. Murphy Secretary Securities and Exchange Commission 100 F Street NE, Washington, DC 20549-1090 Re: Sec Release No. 34-62445 — File No. S7-21-09), I see comments agreeing with our initial thoughts and discussions with the Sec back in March and April 2010. For example:
“Our earlier comments on the Commission’s Proposal focused on issues relating to the cash equities markets as well as issues directly pertaining to the listed options marketplace. We believe the aspects of flash trading that are seen as troubling in the context of the equities markets, namely the disincentive to post limit orders, the creation of private, locked markets that are neither transparent nor fair, and the anti-competitive impact of the practice apply equally to the options marketplace. Arguments to the contrary, such as the potential for options flash order mechanisms to provide price improvement or cost savings, are misleading and must be viewed in light of all potential outcomes, both positive and negative, associated with flash order mechanisms.”
They go on:
Flash Should Be Disallowed Irrespective of SEC Action On Fee Caps
Some arguments in support of flash trading in the options markets state that the practice saves customers money by potentially avoiding the need to route to better priced markets that charge “taker” fees. Nyse Euronext continues to strongly believe that, in the context of the options markets, the concepts of flash mechanisms and the fees that exchanges are able to charge, and potential caps on those fees, are completely separate and independent of each other. Commission consideration of these concepts, to the extent they are not already, should be bifurcated and analyzed irrespective of each other.
I won’t get into any more detail other than to say we in the industry are heartened that we may have some positive changes coming. A level playing field for market makers, traders, and public investors is all we’re looking for.