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Adding and Removing Liquidity | Quick Explanation

Adding and Removing Liquidity

Hey everyone, Ross here from Warrior Trading. In this video, I’m going to talk a little bit about adding liquidity and removing liquidity. These are things that active traders need to know about.

When we’re trading, we have a multitude of different ways that we can send out orders to the market. With online trading that really picked up in the ’90s and has really just grown and grown from there, from our home offices, we have the ability to send orders directly to the exchange, directly to the market. But, how our order gets sent from our computer to the market, well, there’s a lot of different ways it can get there. Some are going to be very fast, some are going to be a little bit slower. As an active trader, you want to find the best path between your platform here and the market.

The cool thing with manually routing your orders is you can choose the path that you think is best. It could be best based on speed or it could be best based on cost, it depends on your preference. Or, it could be best based on the type of order you’re sending. There’s a lot of different variables. Now, when I trade, every single day I send my orders using NASDAQ. NASDAQ is an ECN, it’s one of the market makers that you can send your orders through.

Think of your orders as basically passing a bridge to an island. The market is the island, the bridge is the path to the island. This island, which, let’s say is the current price of Apple, well, that’s the current market price. You’ve got all the buyers and all the sellers there on the Apple island. Each one of these market makers, or ECNs, is a different bridge to the island, and each one charges a toll to pass your shares through that bridge, through that ECN.

One of the things that’s very interesting is that when we pay, and this does not correlate super well in this analogy, but when you add liquidity to the market, you actually get the opposite of paying a toll, you get an ECN rebate. No tollbooth does this, no tollbooth gives you money when you go through it, so this is where the analogy stops. But, with these different routes, some of them will give you a rebate for adding liquidity to the market.

Let’s look at the trading platform here. This is Lightspeed, and this is the current price of Apple right here, and this is my order entry window. When I go to my order entry window, you’ll see market. From market, I have a drop down where I can select any one of these ECNs, and through this selection I’m choosing how I want to send my order to the market. Now, right here I see Arca is selling 1,000 shares at $142.55. I could go and buy those directly from Arca by selecting Arca right here. Let’s see, there we go, Arca. All right?

Now, the thing is, if I choose NASDAQ, that doesn’t mean that, oh, I guess I’m going to have to by at $142.57. NASDAQ has an obligation to reroute your order to get you the best current price, and so they will end up sending your order directly to Arca and you will buy those shares. But of course, it would be a little faster to just buy them directly from Arca rather than sending it to NASDAQ, and NASDAQ then rerouting your order.

For me, I just always use NASDAQ by default, even if I see Arca or EDGX or BATS as the current market maker selling the shares. I use NASDAQ because it’s one of the markets that has the most liquidity. It means that I can almost always get in and get out quickly using that ECN, and the cost is, for me, negligible. I’ll talk about cost in a second, but it’s important to know that for most brokers, you have the options. There are some that don’t give you any options at all, you can only use their smart route which is a disadvantage, because you want to have options.

Right here at, you have the routing fees. We’re going to look at taking liquidity first. Taking liquidity is any time you press an order and it immediately goes through. ZVZZT, this is a NASDAQ test stock. I’m not sure if it will work after hours here, but we’ll find out. Let’s see, let’s just try to place this order. No, it’s not going to go through. That’s fine, though. In any case, if you place an order and the second you press the buy button the order goes through, what you’ve done is you’ve taken liquidity from the market. There was someone selling shares, and you bought those shares, you took them away. If you press the sell button and it immediately fills, you just sold your shares to a buyer, and again, you took away from the market, you took liquidity out of the market.

When you take away liquidity, you have to pay for it. LSPT, which is the Lightspeed smart route, they charge you .0015 per share. That means if you take 1,000 shares, you’re going to pay $1.50. All right, times .0015 is $1.50 for every 1,000 shares. That’s called an ECN fee. Now, you’ll notice that LSPT charges you both when you take liquidity and when you add liquidity, and there’s others that are the same way. But here, we have Arca. Arca charges you twice as much when you take liquidity, so it’s not $1.50, it’s $3 for every 1,000 shares. All right, so that’s a bit more expensive. But, when you add liquidity, they give you back $2. If you use Arca, then you might only be out of pocket $1 if you take liquidity and add liquidity in equal proportions.

All right, so what does it mean to add liquidity? Well, if you place an order right here to buy this stock at, let’s say $9.59, this would be, and I don’t know this will go through. Oh, there it goes, okay. This is adding liquidity because I just put these shares out to the market as a buyer and my order did not get filled immediately. The easy way to know that you’re adding liquidity is when your order does not get filled instantly, because you’re now adding to the market. If your order gets filled instantly, you took from the market and you are taking liquidity, you’re going to pay for it. If you have to sit and wait, you’re adding liquidity.

The other way of knowing is if your order is outside the current bid and ask, you will almost definitely be adding liquidity. If I put a sell order at, well, $13, then I would be adding liquidity. $13.01 officially would be adding liquidity. $12.99, if I have to wait there for a while because the order wasn’t instant, then I will probably also be adding liquidity.

Now, if you’re someone who’s thinking, “Well geez, I’m just going to buy 10,000 shares down here at $98, so look, I’m going to add liquidity on my buy order, and then I’m going to go ahead and sell it at $13.01, I’m going to add liquidity on both sides. I’m going to make $2 for every 1,000 shares as a buyer and I’m going to make $2 for every 1,000 shares as a seller because I’m adding liquidity both ways. That’s an extra $4 for every 2,000 shares.”

Okay, well you know, that’s a possibility. However, one of the things that you have to be aware of is that, because Arca will reroute your order to get you the best fill, when your orders get rerouted you’re not always able to collect the rebate. That means you would actually have to go into your settings and under your custom orders, your sell order, you would have to call it a non-routeable order, which means do not reroute the order. This is not something I would want to do. It’s much more important that I get out at the current price that I want to get out at, than make an extra $2 or $4 on ECN rebates.

I don’t base my trading on trying to make a little money on ECN rebates. To me, it’s not worth it. But, because it’s part of my practice to sell shares on the ask to get the best price, it will just happen that probably about 1/3 of the time I am collecting ECN rebates, and that does help offset the cost of commissions. I’m currently using NASDAQ right here. It’s $3 for every 1,000 shares that I take and $2 for every 1,000 shares that I add. I’m net probably paying about $1.50 because I give back liquidity about 1/3 of the time, and that’s about the same as what I would be paying here with LSPT.

You know really, to each their own. You’re not talking about a huge difference. You can go here and look at the different routes available. Also, be aware that there are some custom ones or interesting ones for dark pool routing, which isn’t something I’ll talk about in this video, but is something we’ll talk about in some other videos. All right, so I hope this has helped you get a better understanding of adding and removing liquidity and how you can use order routing to get your orders to the market a little bit faster. As usual, any questions, don’t hesitate to reach out!

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