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Strategies & Market Trends : Level II Trading -- Ignore unavailable to you. Want to Upgrade?

To: Robert Graham who wrote (358)	3/14/1998 8:53:00 PM
From: Morpher	Respond to of 1086

Sorry for the late reply, I had a busy week. First off, order flow by definition only has to do with market orders. Note that it is advantageous for a MM to represent customer limit orders because then they can judge the direction the market is going. ...He was not revealing in his statement that Datek was not* being paid for order flow. His statement was misleading to say the least.* On NASDAQ trades Datek is listed as either a principal or an agent. In order to get a mark-up and not include it in a net price, a broker has to act as a principal. But according to both Datek rep's post and comparing the trade confirmation slips to L2 quotes, Datek is listed as a principal only when the order is executed through ISLD. In addition I understand that Datek uses SOES or SelectNet preference for marketable Nasdaq orders instead of always going to some specific MMs. Another fact is that Datek actually encourages people to use limit orders. I dug up an older post by the same Datek rep that should clear up any remaining confusion: "Datek Online does not sell its NASDAQ order flow or trade against it. Datek Online merely acts as an agent for its customers' orders. " (#reply-916802) 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. Datek is different from other online brokerage is several important ways that all allow them to be more cost-efficient: they are self-clearing, they sponsor ISLD, 99% of their orders need no human intervention, and they attract frequent traders. My guess is that if the commissions and ISLD were their only source of income (even without margin interest), they would still be quite profitable. In addition every brokerage has to be prepared for the possibility that payment for order flow could become illegal.