why can't retail send sub-penny? Citadel does

Discussion in 'Order Execution' started by bellman, Apr 26, 2016.

  1. bellman


    Most retail order flow is sold to internalizers such as citadel. According to NMS regulations, there must be a price improvement for this to take place. This price improvement is usually a fraction of a cent. My question is, why can citadel offer sub-penny price improvement? Why can't retail traders submit sub-penny orders?
  2. Now that is opening a whole can of worms, and you are likely to precipitate a number of Rick Santelli style rants with a question like that :). Its simple.... because the dark pool operators and the HFT/MM machinery are "cousins". They have a common interest. Mr retail/institutional trader is their combined lunch and place on the Vineyard. Good trading to all.
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  3. some of the people who work high up at exchanges have a stake in HFT. that should answer your question. yeah its messed up.
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  4. ajacobson


    goo.gl/2F3w6W Article on Citadel's size in stock and option execution.
  5. bellman


    Yes, I saw that headline. Internalization is intrinsically bad because the consumer doesn't realize where their order has been routed and how much the broker was paid for that routing, BUT, my very first thought is -- What rule or law allows Citadel to offer sub-penny orders, but prevents retail traders?

    Here is the answer:

    Seems it should be illegal. Maybe this only refers to exchanges, but with internalization, Citadel becomes the exchange, and should still have to answer to Rule 612.

  6. The SEC specifically allows orders to be internalized as long as there is at least a 1c price (0.01 cents/share) price improvement. This is clearly unfair to retail limit orders, but the dark pools/ market makers and brokers/internalizers have more clout than retail and institutional traders and managed to convince the SEC that this would benefit retail traders using market orders, even though it is pretty clear even on market orders the average retail traders would be receive better price improvement on the primary exchange (often 0.5 or 1 cent/share, but perhaps only 10% of the time). On top of that internalization so strongly discourages retail/institutional limit orders that true liquidity on the Primary exchanges has almost completely dried up, leaving only the HFTs as providers of "fake" liquidity that can dry up in fractions of a millisecond.
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  7. garachen


    Hi Bellman,

    You are correct in what you say. The trick is a very careful reading on what Rule 612 excludes. On the face of it, it sounds like it's meant to be comprehensive in its excluding subpenny improvement but whenever so much terminology is strung together you can just invert it to find the loophole.

    A stock can be priced in increments of less than 1c as long as the price is not displayed, and no order, quote, or indication of interest at this price is accepted.

    So, that's exactly what a dark pool does. Orders coming into the pool are in 1 c increments. These function as indications of interest. Then, market makers within the pool are allowed to 'darkly' respond to this interest with whatever price they want. Their responses are not public and they are not limit orders so they don't qualify as quotes, orders or indications of interest.

    I understand why this all happened but I don't trade stocks so am not equipped to judge if the proliferation of dark pools has been a net positive or not - for the industry as a whole.
  8. Daal


    Retail can actually do some of that, its a matter of which broker you use. Most retail brokers don't offer special routes like that but some do
  9. bellman


    I did not realize this, but now that you say it, it makes sense. I think it should be a crime for a broker to take a penny incremented order and route it to a sub-penny destination, but I can understand others disagree with me.
    Any destination that receives retail orders, should be regulated the same as an exchange.

  10. i960


    Everyone in here (and elsewhere) pointing out the fact that the emperor has no clothes but yet nothing is done about it: Ask yourself why that is - then take your money and move it to a futures exchange. The US equity markets are enabling legalized theft via big money players who are essentially non-stop shaving pennies from retail and institutional orders at zero risk. Regulators don't seem to care or find an issue with this (because they're captured already) and expect everyone to just continue eating this shit sandwich.
    #10     Apr 30, 2016
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