TurboTrade.com - The Fastest Way to Trading Success!

Ads are everywhere for low commission trading on Internet with some charging as low as $7 per execution. How can these companies charge so little and can still be in business?

The answer can be found in two customs practiced throughout the brokerage industry:

1) Trading against order flow, and
2) Payment for order flow

For instance, take a firm with a big market making operation (such as eSchwab or DLJDirect). They receive an order from the customer and direct it to their market makers, who are in turn as directed to trade against it for a profit. The market maker tries to make "the spread", usually 1/16 or 1/8 (sometimes much more) depending on the liquidity of the stock. If you are trading 1,000 shares, that amount adds up to $62.50 or $125 respectively. Have you ever been on the receiving end of a lousy execution? Have you ever noticed that your discount broker gives you a report at the same exact moment that your stock has halted its momentum or reversed? This is no coincidence.

If a firm does not have a big market making operation or does not make a market in your particular stock (such as E*Trade and Ameritrade), it will direct your order to another firm that does make a market in your stock. The receiving firm will then kick back revenue to the deep discounter to trade against your order. Payment for order flow can range from 1 1/2 pennies per share to over 4 pennies per share (that is $15 to $40 on that same 1,000 shares).