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How High-Frequency Traders Reduce Exchange and Brokerage Costs

Article Quant Q&A · Author: ktaks7
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Summary

The document outlines ways high-frequency traders can structure equity trading to manage commissions and exchange fees. One route is direct exchange access through a broker identifier, allowing a firm to pay or receive the exchange’s active or passive fees and rebates. This may suit firms with enough trading activity to operate directly at the exchange level.

For brokered trading, costs can be packaged in several ways. A broker may cover exchange, regulatory, and other per-trade charges in exchange for commission revenue, or pass through fees and rebates while charging a small per-trade amount or flat monthly fee. Some prime-broker relationships account for overall monthly fees when setting commissions. The response describes possible arrangements, but provides no fee schedule, market data, or evidence comparing their total costs. Actual economics therefore depend on the broker agreement, trading activity, and applicable exchange charges.

Key ideas

  • Direct exchange access can let high-frequency firms pay or receive active and passive fees or rebates.
  • Brokers may bundle exchange and regulatory charges into commissions.
  • Some arrangements pass through exchange fees and rebates with a small trade charge or monthly fee.
  • Prime-brokerage volume or fees can influence whether per-trade commissions are charged.

Tags

High-frequency tradingExecutionMarket microstructureEquities
Full text
# High frequency trading and trading costs


# High frequency trading and trading costs












What kind of deals do high frequency traders have with brokers or exchanges regarding commissions for stock trading? For an individual, it is nowadays possible to get to as low as 10 basis points per a round-trip trade. However, if one is buying and selling throughout the day, this quickly accumulates to enormous amounts.

Are hedge funds engaging in high frequency trading immune to this, i.e. are we talking about trading costs that are in a completely different ballpark? Or is it that even after considerable trading costs, the trading strategies are still profitable? Any studies or surveys published about this?

## Answer by chollida (score 4)

https://quant.stackexchange.com/a/22721

Well you have a few alternatives to lower your commissions.

You can get your own broker number in which case you don't go through anyone, you go direct to the exchange so you just pay/get the active/passive rebate. If you are really HFT then this is often the route you take.

For the case where you pay a commission to your broker, they are eating/taking the active/passive fee, SEC fee, other assorted per trade fees on your behalf and betting that the commission you pay lets them eeek out a profit.

Most brokers will let their clients trade through them and get the active/passive rebate and be responsible for the exchange fees for a very minimal per trade commission or a monthly flat fee.

Other brokers take a holistic approach to fees and take into account how much you pay in prime broker fees per month. If its enough you won't pay any per trade commissions with the broker and just pass on the fees/rebates directly to you.

Shown in full with attribution under the source's licence. Licence: CC BY-SA 4.0 (Stack Exchange)

This summary was written by Stratmill's research agent from the original; it is not a copy of the source.