I will refer you to page 96 of the book. The specific example is 100 shares of MSFT asking $30.00 and 10,000 shares asking $30.01. Because of Reg NMS, your broker is required to take down the 100 shares first ("NBBO"), allowing the HFTs to then start buying the $30.01 offer and front run the remainder of your bid. The problem with this requirement, according to Lewis, is the NBBO is priced off SIP rather than direct feeds. I don't disagree with the literal point that you are making, however, there is no need for this kind of intermediation. Why should natural traders pay intermediaries for this function? Why shouldn't they coordinate on an exchange where they don't face this tax?

RegNMS requires exchanges and trading centers to honor the Order Protection rule to route trades to the trading center with the best listed bid/ask price.

I don't think RegNMS requires a broker-dealer like RBC to route its order to any particular exchange.

Brokers already have a duty of best execution to their clients. They are allowed to use their judgement to send orders to any given exchange regardless of the NBBO. That's what enabled RBC to implement "Thor".

I'm not an expert but I believe you are incorrect. What you are suggesting is that the broker could perform a "trade-through", which was allowed under the old ITS rules. Under the Order Protection rule, trade-throughs of even 100 shares are explicitly prohibited. Reg NMS is very strict and that's why it is so controversial. My understanding of Thor is that it does not trade through, but it executes at all relevant exchanges near-simultaneously by delaying order routing to lower-latency exchanges. This prevents HFTs from sniffing your order at one exchange and beating you to the next.

I too raise my "not an expert" flag and await corrections from 'yummyfajitas or 'kasey_junk.

There are a number of possibilities depending on whether you send in a routable order (it's a flag you can set -- route or don't route, and there can be fees associated with routing). What a sophisticated trader would do is send two orders simultaneously taking out the small 100 lot at 30.01 and the 10,000 at 30. The exchange with the larger but worse price order will accept your order if you set the ISO flag, indicating you have sent orders to clear out better priced orders at any market centers displaying a better protected quote.

That's correct. As long as the exchange to which the order is routed is presenting NBBO at the time the order is executed, then the broker is compliant with Reg NMS.

Also note, if that exchange is not offering NBBO, it is bound by Reg NMS to route onward to the actual venue that has NBBO. The exchanges are also bound by Reg NMS, not just broker dealers.

If it were a single order in the book, I'm not sure I see the advantage HFTs would have conceptually had. They're not sniffing individual orders and then outrunning them before the original order hits the exchange; they're exploiting the individual piecemeal orders that are stealthily trying to move the block.

They're hunting down the orders of informed traders who are trying to exploit their own knowledge of the true price of products, and correcting the price on the market before those informed traders can take their knowledge out of everyone else's hide.

The institutional orders get baited to BATS BYX with "taker rebates" (on BZX the fee structure is the normal maker-rebate taker-fee, but on BYX it is reversed). It hits BYX first because the broker's router is programmed to send it there first for that rebate, but its only for a minimal amount of shares. And that's a signal which the HFT firms use to pull or front-run equivalent offers on the various other exchanges.

The other big scam seems to be HFT firms buying a broker's order flow - for hundreds of millions of dollars. For example, Schwab sold its order flow to UBS for 8-year contract in 2005, for $285 million. It was massively underpriced, Schwab is said to have left a billion dollars on the table. And UBS, in turn, sold Schwab's order flow to Citadel for an undisclosed sum. Why is the right to execute a broker's order flow so valuable? Nobody seems to have a good answer, but the obvious reason is that its easy scalping.

I see a lot of heat generated in this discussion, but I don't see an answer to your second paragraph. That's the answer I want to see.

It is the easy scalping he mentioned.

A market maker can only stay in business if they sell as much as they buy and if the average sale price is above their average buy price. They lose money if they provide liquidity in the way of market moving forces.

Market makers try to avoid informed and "toxic" order flow and broker flow is guaranteed source of small uninformed orders that are most likely going to be crossing the spread.

The answer is retail flow has no information - it's the ideal flow for professional market makers to trade against

While it's true that retail flow has no information, it's also true that a broker will obtain better executions if it does not sell order flow to HFTs.

http://www.elitetrader.com/vb/showthread.php?t=245029

https://institutions.interactivebrokers.com/en/index.php?f=1...

Yes exactly. A lot of people don't seem to understand this.