We have discussed Payment for Order Flow (POF) and how High Frequency Trading (HFT) firms make money on your trades. We’ve shared how Maker-Taker affects the way that trades are executed. Now let’s see what you can do to improve your trading returns within this complex and often predatory environment.
Limited Order Routing Options
If you are trading through a traditional retail broker, you likely have a limited number of ways to route your order, if any. Routing your order is usually limited to a “smart” route, or possibly a preference for NSDQ or ARCA. More advanced firms may let you choose IEX. These limited choices do not really help, as you don’t see the pricing difference between the selections, nor can you change them easily if something in the market changes.
“Smart” routes are simply computerized algorithms that assist traders in buying or selling stock, aimed at making the search for liquidity easier. They are not trading systems, but rather a set of instructions based on certain conditions set by the trader, and are customized by the trader or pre-set by the broker or software. In addition to limited orders, a trader’s ability to post bids and offers through ECNs is limited to which venues your broker has subscriptions to use.
Most retail brokers have agreements with third party firms where they get paid for sending your order to them for execution. This is the “smart” route if it is one of your choices. Brokers used to have networks of people who would work to execute your order, and your commission paid for that network and the cost to execute your order. Now, in addition to whatever commission you’re paying for that service, executing your order is no longer an expense for your broker, but has become a profit center.
Who Profits on Your Order?
Third party firms paying for orders under POF obviously aren’t losing money on the transactions either, they are making money as well. Reg NMS says your broker is obligated to provide you with the best execution available at the time. So how are two firms managing to profit from your order, while still giving you to best possible price?
Maker Taker
One way that two firms profit from your order is that they are getting paid for the liquidity you provide. If your order is not immediately marketable, they send it to the venue that pays the most for adding liquidity.
For instance, providing liquidity on ARCA for a 1000-share order would result in a rebate of about $2.00 that goes to the POF firm that paid your broker for the order.
HFT
The other scenario is that the POF firm used your order as part of a profitable trading strategy.
For instance, in heavily traded stocks, a fair amount of trading is done at the midpoint of the NBBO (National Best Bid and Offer). If the market is 30.24×30.25, and you send your order to buy 1000 at 30.25, the POF firm sells the stock to you at 30.25 (usually at something like 30.24999, which lets them jump ahead of everyone at 30.25), then sweeps through the dark pools and midpoints on exchanges and buys the stock at 30.245, netting a profit of about .005/share, or $5.00, on your order.
The POF firm may also know the market is about to turn and go to 30.23×30.24. They know this via sophisticated predictive algorithms based on trades and changes in quote sizes, combined with direct market feeds that are faster than the feeds that create the NBBO.
The faster direct feeds may show the market is already at 30.23×30.24, but the NBBO won’t reflect that for another few milliseconds. This makes it easier – they give you the “best execution” available on the official source, the NBBO, at 30.25, then turn around and buy the stock back at 30.24, the true offer in the market.
Why You Need to Take Control
It is vital for trading success to have control of your orders. For the retail customer that is trading a few hundred shares a couple times per month, the amounts made from these orders is negligible. To the HFT firm doing this across thousands of accounts every day, however, it adds up to millions of dollars.
To the trader with a larger account trading 50,000+ shares per month, this adds up very quickly.
There is a need to have greater control over your orders and capture extra profit per trade, rather than have your orders sold to someone else.
How to Take Control of Your Orders
It is necessary to have the availability of order types that allow you to go directly to dark pools, combined with an increased knowledge of the market, to enhance your order options and trading experience. It also takes experience and resources to place orders at the midpoint of the NBBO, and capture rebates by adding liquidity to the market.
Great Point Capital has the availability of order types, an increased knowledge of the market, and the resources to maximize your trading returns. Rather than selling your orders, we let you direct orders to the venue that gives you the best outcome.
Here is just a sample of the order types you can access:
ARCA ALO – Add Liquidity Only on ARCA. Make sure you get a rebate for adding liquidity.
IEX D-PEG – Tries to get filled at the midpoint, but will automatically back away to the bid or offer if it senses the NBBO “crumbling,” or about to move.
OnOpen/OnClose – Get the opening or closing print. Also gives you access to ImbalanceOnly orders, which fill against large imbalances that move the stock in the last few minutes before the open or close.
Dark Only – scan the dark pools to find liquidity without impacting the lit NBBO.
Great Point Capital Gives Traders the Tools for Success
Great Point Capital has been providing traders with tools for success since 2001, offering modern technology, beneficial order types, capital, flexibility, stock loans and payouts with great benefits.
Technology
Great Point Capital offers Takion Software, a modern trading platform meeting the needs of active traders. Takion is selective in providing their trading platform software to only the most experienced of trading firms. GPC employs knowledgeable and experienced traders to take full advantage of all capabilities Takion has to offer.
Order Types
Access to the most beneficial order types, including the available order types to go directly to dark pools, to place orders at the midpoint of the NBBO, and capture rebates when adding liquidity.
Capital
Great Point Capital provides one of the largest capital bases among prop trading firms, giving you the resources to benefit the most from your trading. Using our capital gives you leverage that you would not otherwise have, providing an excellent opportunity to earn maximum returns on your trades.
Flexibility
Great Point Capital gives you the flexibility to trade remotely from anywhere with internet access, or in our offices in Austin or Chicago. You can develop an automated strategy, or trade by hand, the choice is yours.
Stock Loan
Great Point Capital partners with other firms that specialize in locating hard-to-borrow names, giving you the widest selection of stocks to trade.
Payouts and Benefits
Registered proprietary traders with Great Point Capital enjoy access to our group health plan, in addition to aggressive payouts.
With the seemingly endless choices available to traders for routing your orders, it is challenging at the very least to know how exactly to take control of your orders. Great Point Capital has the knowledge, technology, order types, and the capital to provide the most flourishing environment to hone your trading skills, netting you bigger returns.
Great Point Capital has been serving the trading community since 2001. Our 100+ prop traders actively trade the firm’s capital, specializing in equities and equity options. We are one of the very few firms able to offer access to Takion Software Platform, enhancing your trading performance. For control of your orders and to earn to your maximum potential, contact us today to speak with one of our knowledgeable staff.