Q&A by Don Bright
LIQUIDITY, REST, AND ROUTING
I see you have been posting about your firm’s new approach to order routing that is saving or making your traders a lot of money. I remember you used to say “take liquidity on the Nyse (or Nasdaq) and rest or leave your orders on Arca.” Could you explain the differences you see now? Could you start by explaining “take liquidity” and “rest” orders? Does any of this routing make that much of a difference? My broker advises me to use only market orders anyway, so how does this affect me?
Wow, a lot of good and timely questions. First off, thanks for reading my posts, and be sure to keep reading S&C, since I plan on doing an article on the many industry changes in this regard — about the consolidation of exchanges, the new crop of electronic communications networks (Ecns), and their competition. I arranged to interview the top people at several market centers.
Now to your questions. When we hit a bid or take out an offer immediately, that is called “taking liquidity.” In the past, we always had to pay extra to do so.
However, we would also be paid to leave our orders “resting” at various market centers (like Arca). So we would take where we paid the lowest price (with good liquidity) and rest where we got paid the most. This is called “providing liquidity.” It was pretty simple.