With the advent of Direct Market Access (DMA) there are now ways for traders to gain access directly to market makers and ECNs and bypass gateways from standard brokers that take more time for you to get an execution.
There are a ton of different order routes to choose from but we have found ARCA and EDGX. Not every broker has this feature for traders so make sure you check with them before opening an account if you wish to participate in DMA.
Order Routing – Liquidity Matters
Not every ECN pays the same amount for providing liquidity and some even charge more for taking it out so make sure to find out from your broker what they debit/credit is for each ECN.
To participate in adding liquidity you have to place your order correctly. For instance, if you are buying you have to place your buy order on the bid or lower.
This puts liquidity in the market and if it is executed you will receive a small credit, usually a fraction of a penny, based on the amount of shares executed.
The same goes for shorting or sell order. You would have to place the sell order on the Ask or higher to be adding liqudiity to the markets and if executed you will receive a credit based on the amount of shares executed.
However, if you take liquidity away then you will be charged a debit to your account for taking liquidity out of the market and is charged on a per share basis.
So if you place a buy order on the Ask or at the market you will be taking liquidity out of the market and will be charged the fee. Usually the debit is slightly more than the credit.
Warrior Trading Pro Tip
Being an active trader means every cent counts and is why it’s a good idea to try and take advantage of either reducing your ECN fees or even taking a little bit home, because over the course of a year you will place a lot of trades and those fees will add up to quite a bit.
Trading momentum makes it hard for traders to get long off the Bid and will most of the time have to pay up to the offer to get in so we don’t miss out on the move.
However, what traders can do to make up for the fee you will pay to get in is to place exit orders on the offer as the trade moves in your favor. This will cut you ECN fee in half and that could add up to big bucks in the long run.