In Search of the Perfect Investment

You and I can’t direct our retail broker — online or real person — to send our orders (buy or sell) to IEX. No retail broker connects at present. But we will apparently be able to  in the next few days. IEX will then announce some brokers it connects to.

Hang tight.

What I did learn — which disgusts me — is that brokers are paid for order flow. Note, it’s order flow, not transaction flow. They send my order to wholesalers who then send it to an exchange. The broker gets typically paid 5 mills to 30 mills per share per transaction. A mill is one one-hundredth of a penny, Hence, for an order of 100 shares, the broker could receive as much as 30 cents from the wholesaler.

Once the wholesaler sends my order to an exchange, then “maker / taker pricing” fees are involved. These fees are for “adding or subtracting liquidity.” I don’t understand how they work.

Under SEC Rule 606, broker/dealers (like the ones you and I deal with), who route orders on behalf of customers, are required to prepare quarterly reports that disclose certain information on their order routing practices.

I googled Fidelity  Rule 606 Report and found: (Fidelity is the broker I use.)

And the payments?

Note: Fidelity is directing most of it NYSE orders to KCG for which it gets paid more than sending it to anyone else. The report doesn’t give a total dollar figure on what Fidelity gets every quarter. We know Fidelity’s owners are billionaires. I’m guessing the order flow kickbacks must be substantial. You can find Fidelity’s latest 606 Report here.

Do my trades get a better or worse price because of Fidelity’s chummy relationship with KCG? I have no idea. I suspect not.

I believe that when I am able to direct my trades to IEX, my execution quality (i.e. the price I pay and get)  will  improve.

Everyone has an interest in this. Including CNBC getting a boost to its viewership ratings, and Michael Lewis selling his excellent book:

I may be making too much of it. It irks me that someone (or more precisely some computer) is front-running my trades.

This is an ongoing story.

Harry Newton who has discovered  that if you reboot your computer every few hours, it will run much faster. Under no circumstances, do not leave it running 24/7.