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.
Comments
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.