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.