Your Order Doesn't Go Where You Think It Does

You hit send on an order and you assume it goes to an exchange. It doesn't.

Here's what actually happens, and I've drawn this out on the whiteboard enough times that I can do it in my sleep. 

Your order leaves your screen and goes to your broker first. Schwab, ThinkOrSwim, Fidelity, doesn't matter who. 

They all route the same way and they're all full of it when they tell you otherwise.

At the broker, your order gets authenticated. Is that really you? Do you have enough money to do whatever the hell you're trying to do? If it's an options trade it runs against something called a margin library, which is a database somebody had to teach every single trade to, one at a time. 

I spent years on that work. Nobody calls it artificial intelligence, but that's exactly what it is.

If you pass, the order moves on. 

If you don't, it pings right back at you and you get that rejection sound. Bee-dunk. 

Everybody's been de-dunked before.

Now here's the part almost nobody knows. Before your order ever sees an exchange, it passes through what I call the amorphous blob. 

The blob is Virtu. It's Citadel. It's Jane Street. 

These are market makers, and they are paying your broker for the right to look at your order first. That's payment for order flow, PFOF.

People lose their minds about this. I don't. Because if they take your order, they have to fill it at your price or better, and better is what happens more than 70% of the time. Their whole business is making a fraction of a penny tens of millions of times a day. They want your order so badly they'll pay for it.

Want to know the alternative? Chicago in the late '90s. I was there. Brokers on the floor put retail one-lots at the back of the queue because a one-lot was the same work as a hundred-lot, so guess which one got filled. 

This system is utopia compared to that. Not perfect. Utopia.

So here's why you should care today. 

When the blob doesn't fill you, your order sits on an exchange and rots. 

But every time you cancel and replace, you get a fresh split-second look from a different firm. Citadel passes. Cancel-replace, Jane Street passes. Cancel-replace, Virtu fills you. Every cancel-replace is you saying, here's my order, take a look.

That's not fidgeting. That's good trade practice. And it costs you nothing but a few clicks.

Tomorrow morning I'm doing something different.

I'm going live at 9:15 AM Eastern on Thursday, July 23, and I'm walking through a position I actually have on right now. Not a hypothetical. The real trade.

The strategy doesn't care which way the market goes. Up, down, sideways, it's irrelevant. I'm showing brokerage statements live: 19 wins, zero losses, $12,789 on one unit. The trade I'm walking through collected over $1,300 in credit the day I placed it, and ThinkOrSwim put the probability on it at 99.87%.

It runs in an IRA. It works with around $10,000. No charts, no screen-watching. Four steps and you're done. Alert, place, live your life, close.

First 50 people to enroll get a former CBOE market maker as their personal concierge.

It's free. Thursday, 9:15 AM Eastern.

Save your seat here.

To your success,
Don Kaufman