Monday, November 17, 2014

Broker Order Routing, in a High Frequency Trading World

The brokers/dealers have had their fair share of scrutiny among the recent revelations in the high-frequency trading (HFT) saga.

Among the questions being asked are whether Brokers are routing orders to whichever venues pay them most handsomely for the flow ... and potentially not to whichever venue provides best execution for their clientele.

We previously covered the discount brokerage world in which TD Ameritrade is being sued
(see for example Gerald J. Klein, on behalf of himself and all similarly situated v. TD Ameritrade et al, 14-cv-05738) for their order routing decisions.

You may recall that shortly after New York's AG filed a complaint against Broker Barclays in June 2014 for issues relating to its dark pool, Broker Barclays saw a precipitous decline (of roughly 66%) in trading within its own dark pool.   Some of that has returned, but while the tide has turned and the "true" nature of trading activity in some of the dark pools has been revealed, others like Wells Fargo have had to shut their dark pools: each venue requires a certain amount of trading activity to be relevant, or advantageous.

Brokers' Routing Decisions - Where to Send the Trades

Today we're covering a little of what we've found in the brokerage world itself: the changing nature of Brokers' routing orders to their own dark pools. We're spent some time digging through order broker routing information in their quarterly Rule 606 reports, and found some interesting changes in the regularity with which some of the large brokers are routing "non-directed" orders -- orders for which the client hasn't specified a specific execution venue.

The data are sparse, and the time periods short, but it seems like Credit Suisse (which has the largest dark pool) is generally substantially increasing its order routing to its internal dark pool, while Goldies and Broker Barclays are generally decreasing their self-routing decisions.

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