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Strategies & Market Trends : Level II Trading

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To: Morpher who wrote (353)	3/10/1998 11:10:00 AM
From: Robert Graham	Read Replies (1) of 1086

Not to start a heated discussion here, but I noticed some apparent confusion about online discount firms and payment for order flow. First off, order flow by definition only has to do with market orders. So yes, Datek does not receive a "kickback" for limit orders handled in this way since they are submitting the order to the book of an ECN as a limit order. I find the reference to the post by Jon Normile interesting considering it has been used to prove that Datek does not route orders for order flow kickbacks. All the statement in that post which refers to payment for order flow says is that Datek "being listed as principal does not mean that we are trading ahead of our customers or selling order flow". He was defining the use of the term "principal" and why Datek must list this term as describing how they represent themselves in relation to their customer orders. He is right, that the term "principle" does not include as part of its definition the illegal practice of "front running" and the legal practice of payment for order flow. He was not revealing in his statement that Datek was not being paid for order flow. His statement was misleading to say the least. IMO Datek is definitely receiving a substantial amount of revenue from order routing as do any and all other discount firms. This is how Datek can give you inexpensive order transaction fees. Apparently Datek states that they use this approach to business both as part of the description of their terms of service and on their order receipts they send to their customer. How much more clear can Datek make this to their account holder? The only other source of significant revenue for a brokerage firm would be their margin accounts. Let me make this message of mine clear: brokerage houses are in business for a profit. You will not come across any generous brokerage outfit that is willing to give up to you a slice of their profits because they are just "good guys" that feel "generous". You as their customer will receive the lowest charges they find necissary to give you in order to remain competetive in their market place as an online discount broker and procure at the very least an entrepeneural profit which is the profit the ownership of a company requires in order to make their efforts in the business worthwhile. Of course the ownership of the business is looking for much more than this entrepenural profit. If it is a shareholder based company, then there will be even higher profit expectations. Business in the U.S. cannot operate any differently and expect to survive in a competetive market place. I am sure anyone who intelligently operates in the stock market must realize this. Perhaps some are forgetting brokerage firms are businesses too. Can this be possible? Bob Graham

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