Mike,
First off, your freind is mistaken. Obviously from my tone here, the time I take to answer questions, and from my tone I take with anyone that has given a call to say hi, to get to know us, or even do business, that is far from our approach. You don't go 20 years with that approach, in any business.
I have always spent great time trying to explain my points, ideas, strategies, and philosophies on brokerage firms. Many times they are quite verbose and some may fell, too long.
I probably get 7 to 10 emails per day asking about our firm, our philosophy, etc. Yet I only received three or four in the past six months regarding order flow and why I dislike firms that use it so routinely. I did receive one from someone who consistently wanted to "convince" me that he thought he was getting the same level of execution with a firm that routes orders. He presented seven different reasons, three different examples, etc. etc. I disagreed.
I will always disagree with the nondiscrimintory routing of orders. By that, I mean that a firm simply routes all orders, without looking to see if a price improvement can be made, or whether the order canbe protected or worked to the client's advantage. Sometimes, working an order for an improvement or protecting the order doesnt take verymuuch work, an extra ten seconds of effort. But if you route orders, ALL THE TIME< EVERY SINGLE ONE OF THEM AS THEY ARE SENT TO YOUR FIRM's Computer SYSTEM AND THEN REROUTE THEM TO A MARKET MAKER THAT IS TRADING AGAINST YOU, MAKING THE SPREAD, ACTING AS PRINCIPAL, it is not toyour benefit. This is how they make money. If you told E-Group they were losing their order flow, it would be a large percentage of their overall ticket revenue. They can't do busines for $9 a trade. Noone can, not in any industry requiring this committment to finances, technology, etc.
I am sorry if that opinion bothers you. I wouldn't be doing anyone any good if I simply didn't say what I felt was right. I work in the industry. I see what goes on. I can route orders if I want. At times, it can be done TO THE CLIENT's advantage. Most of the time, its not. I get an order to buy 200 abcd, the market is falling a bit. I could simply route the order for an extra $5 or so of commission, the customer would get a fill at that price in a falling market. Or I could setup soes to protect the order and work it on selectnet for an 1/8 or 1/4 improvement. Sometimes its much, much more. For instance, the day after the -550 crash, when the market started taking off, we were selling stocks at signficant (some up to 1, 1 1/2 bucks ) more than the limit. Whena customer makes that extra 1, we don't get pissed. Its not a dollar out of our pocket. We are happy for the client. That is what we get paid to do. We act as an agent only, not a principal in stock transactions.
Imagine you andyour family went to buy at $125,000 house (no different than 1000 shares of WLA). Imagine the attorney you were using to represent you, you found out, was buying the house from you. Sure he might have order handling and manning rules, but ultimately it is penny wise and pound follish. Sell the house to the attorney, but get an attorney of your own.
Specific issues:
1. order handling rules give mm's and firms 30 seconds to try to make the market before they must showthe order. 30 seconds is a lifetime. For mm firms doing thousands of shares in that period of time. Imagine as a traderif I said I had 30 seconds to try to work against your order.
2. You don't see these firm's explaining this order flow, their exclusive use of third markets etc. They talk about $19 trades but nothing about the less liquid mm or less liquid exchange towhich your trade is sent.
3. There are firms out there that will protect yourorders for about $35 a trade instead of of $19. To me, the $16 is meaningless, because many times its get paid for with price improvements and order flow. Many times orders that we work we can save 1/8 , 1/4 or even more. It adds up and pays for the $16 and then some. That is why we have been able to carve a great niche. Most firms don't want to spend 1/2 hour on some 400 share order. Route it, take $19 and $8 for order flow and be done. Its a great business model, but there are others that can do better.
Pennywise and pound foolish means you try to save the 16 and you end up paying it and then some in flat out bad executions or by not receiving the price improvements that occur. Have you ever seen a stock that was 10 to 10 1/4. You go in with a market order to buy and you get 10 1/4, all the while its printing at 10 1/8, 10 1/8, 10 , 10 , 10 1/8, then one piece at 10 1/4, 10 1/8. You get filled at 10 1/4. You say, why not 10 1/8, or even 10 for that matter.
By the way, did you get a copy of the email message? Did you see it? Many times some of these concepts are simply to detailed and difficult to explain via. email. To truly understand the disadvantage at which you are placed, you have to understand the way brokerage firms make money, where their costs lie. It is also a tough thing to determine the quality of the product, the quality of the execution, etc. Most customers don[t have fulltime quotes and can't see the stock printing at 10, 10, 10 , 10 1/8, 10 and then their market buy at 10 1/4. As well, with multiple mms it is even more tough to figure it out as a nonprofessional, let alone a professional.
After all, making markets order flow, principal transactions, in-house crosses, etc. are not basic concepts. We know them because we spend the time working these thread, but most dont. Many times individuals get upset that I might take issue with firms that they might infact be using.
Look, as recently as yesterday I had stated in a long email that I felt these firms were appropriate for certain individuals, with a bit more experience than the novice and not trading size. For most, they are not.
Thats my opinion. I have always presented them respectfully. If your freind thought I was being short, ask him/her to call me. I would be glad to walk through. For some investors, these online firms offer great service andmight bethe ticket. I would be glad to tell your freind that if they fell into the category that Ithink is right for them. I think your freind perhaps took it personally since he was using one of these other firms. Given his circumstances, I might continue to disagree. such is life. Noone will win. His points simply did not convince me otherwise.
For about $20k, I could bring in here electronic internet trading where orders arerouted to our trading desk. Pershing offers us the same interface as DLJDirect. We could do the business for $20 a it would be very profitable. Add another 20 for order flow and each ticket is actually 40, more than the 35 we charge many clients. It would cost us something significant in doing so, the quality of the execution, and that would be business model we just don't want to entertain. The customer ends up losing out. The way we are setup right now, we both do alright.
Regards,
steve@yamner.com |
