According to their site, they claim that you'll "buy and sell at the best possible price"; I'm not sure how they are able to make this claim if they cannot route your orders directly to the exchanges.
On their mockup on their site, the orders screen has an "Estimated Price" which is a strange field as typical order types should be either "Limit" or "Market" and should show the bid/ask spread on the current security; so I'm guessing that the best "possible" price is the "market price" and they are doing a combination of
1) Internal matching; orders aren't being routed to exchanges but if are internally matchable, just reconcile the books internally and they collect the bid/ask spread on both side of the trade.
2) Payment for order flow: they route your orders first to Citadel and Timberhill where marketmakers love to take the other side of retail order flow.
3) Internal marketmaking: they'll take the other side of your trades themselves and try to immediately close their negative positions by routing the order to an exchange for rebates and a better price.
> they claim that you'll "buy and sell at the best possible price"; I'm not sure how they are able to make this claim [...]
My guess: they already advertise that they are constantly getting market prices from multiple sources - so they simply run a Best Price Execution algorithm for every trade and use the current state of their (locally cached) total market state. So a trade may get matched up against multiple bids, where a single bid may not be enough to satisfy the full order amount. So they apply BPE (think of it as a greedy algorithm) and find the next best available price to complete the trade. Iterate until the entire trade is matched and that's it.
Disclosure: I work for a betting exchange. We do BPE.
>Internal matching; orders aren't being routed to exchanges but if are internally matchable, just reconcile the books internally and they collect the bid/ask spread on both side of the trade.
Doesn't that violate national best bid? Also, a lot of retail dumps market orders, so how do you determine the price to match buy-sell pairs at?
Well, you are matching the buy and sell order of your internal orderflow at market prices, e.g.,
Retail trader Bob wants to buy 100 shares of MSFT at the market price
Retail trader Sue wants to sell 100 shares of MSFT at the market price
NBBO of MSFT is at 36.70/36.72
You fill Bob at 36.72; and you fill Sue at 36.70. So Sue's account is credited with 3670 cash while Bob's account is debited by 3672 cash for the privilege of owning 100 shares of MSFT; while you collect the $2 difference and get RegNMS compliance.
I don't think this works for typical retail brokers. There's just not enough volume, except for in a very small handful of the most active stocks. Remember, nowadays people expect execution confirmation in less than 1 second.
Now, on the other hand, if you're Getco, you get to see these orders from every broker in the country. If you can trade against that, you can make money even with a bid/ask spread of $.02.
So if you're Getco, (hypothetically, I have no direct knowledge of them, except that they're big in market making) you can go to the retail broker and offer them price improvement.
E.g. in return for the order flow from that broker, Getco fills them "inside" NBBO. Getco bids 36.7001, Getco asks 36.7199. (I get confirms like that constantly from my retail brokers). Getco also gets rebates from the exchanges for "adding liquidity". I.e. NYSE or NASDAQ pays Getco for certain types of orders. Getco can kick back a portion of those rebates to the brokers.
This type of market making (known as specialists on the NYSE) was wildly profitable up until decimalization about a decade ago. Now there are only a few firms left, because the spreads are tight, so the volume needs to be high in order to make any money.
Plus, one bad day because of a computer error can totally destroy your company. E.g. when Knight Capital Group blew up just one year ago and was subsequently acquired by Getco.
According to their site, they claim that you'll "buy and sell at the best possible price"; I'm not sure how they are able to make this claim if they cannot route your orders directly to the exchanges.
On their mockup on their site, the orders screen has an "Estimated Price" which is a strange field as typical order types should be either "Limit" or "Market" and should show the bid/ask spread on the current security; so I'm guessing that the best "possible" price is the "market price" and they are doing a combination of
1) Internal matching; orders aren't being routed to exchanges but if are internally matchable, just reconcile the books internally and they collect the bid/ask spread on both side of the trade.
2) Payment for order flow: they route your orders first to Citadel and Timberhill where marketmakers love to take the other side of retail order flow.
3) Internal marketmaking: they'll take the other side of your trades themselves and try to immediately close their negative positions by routing the order to an exchange for rebates and a better price.