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On line stockbrokers are not making money at 9 bucks a trade. Why do
they do it, then? A few reasons, but the one I want to bring up is
sale of order flow. This involves selling orders to marketmakers or
other traders (often times a subsidiary of the "Discount Broker").
These traders pay for the order (on the order of 20 bucks, I'm told)
why? So they can get a better fill than you and fill at your price,
making the difference.
(Discount stock brokerage has prospered to the extent that
professional traders can outtrade the customers on their own orders.
There is certainly room for this in the industry for customers who
really don't give a whack, though personally I think it blurs the
lines of deception. I once interviewed with what was then the 3rd
largest "discount broker" in the US. There the national sales manager
gave me the secret: "It's all bait and switch," he revealed to the
potential recruit. I was newly disillusioned and remained unemployed.)
This is a decided disadvantage if you need quick and relatively sure
executions (i.e. this works against the daytrader of stocks). If the
1/8 or 3/16 "slippage" doesn't matter to you, that's great. If your
position trading, it may be fine. But daytrading, every tick counts
and you must have as much control over your order as you can get.
There's also the issue of how well disclosed this practice is...
fwiw
cw
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