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Interactive Brokers: Adding & Removing Liquidity


Mephistopheles
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This is a two part question:

 

1. Do you generally add liquidity or remove it when you trade? I just found out what these terms mean today, so for those who don't know: "add liquidity" means to put in a buy order below the ask or sell order above the bid, and "remove liquidity" means to do the opposite. I assume that a healthy number of people here add liquidity given this is a value investing forum. I generally remove it given I am usually trading in very liquid large caps and tend to buy when a stock is collapsing; so I usually just take whatever the market is giving me in a hurry before the deals disappear.

 

2. For those who trade with IB, do you use a tiered or fixed cost commission structure? They say tiered is beneficial for very high volumes (millions of shares per month), or if you're generally adding liquidity depending on the exchange, because this latter method will earn you rebates. My volumes won't be anywhere near the volume necessary for tiered to be cheaper than fixed, but I am trying to figure out whether it's worth trading by "adding liquidity" to save on commissions vs. the fixed cost. I haven't done the math, mainly bc there are a handful of different fees for tiered, and fees vary for each exchange. But my question for those who know is - a) do you receive rebates for all NYSE and NASDAQ trades if you add liquidity, and do these rebates make the tiered structure worth it? b) Is avoiding "removing liquidity" worth the savings in fees?

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This is a two part question:

 

1. Do you generally add liquidity or remove it when you trade? I just found out what these terms mean today, so for those who don't know: "add liquidity" means to put in a buy order below the ask or sell order above the bid, and "remove liquidity" means to do the opposite. I assume that a healthy number of people here add liquidity given this is a value investing forum. I generally remove it given I am usually trading in very liquid large caps and tend to buy when a stock is collapsing; so I usually just take whatever the market is giving me in a hurry before the deals disappear.

 

2. For those who trade with IB, do you use a tiered or fixed cost commission structure? They say tiered is beneficial for very high volumes (millions of shares per month), or if you're generally adding liquidity depending on the exchange, because this latter method will earn you rebates. My volumes won't be anywhere near the volume necessary for tiered to be cheaper than fixed, but I am trying to figure out whether it's worth trading by "adding liquidity" to save on commissions vs. the fixed cost. I haven't done the math, mainly bc there are a handful of different fees for tiered, and fees vary for each exchange. But my question for those who know is - a) do you receive rebates for all NYSE and NASDAQ trades if you add liquidity, and do these rebates make the tiered structure worth it? b) Is avoiding "removing liquidity" worth the savings in fees?

 

Many of the stocks I'm trading in lack liquidity, so when I'm buying or selling I'm generally removing liquidity from the system to ensure the trade gets done so I can't speak too much on rebates. I do know that there was a debate here recently where the outcome was basically that tiered is likely to be cheaper even for lower levels of volume and trading.

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I used tiered, and I almost always provide liquidity (I use limit non-marketable / passive limit orders usually), so my perspective likely won't answer your question directly.

 

I would suggest though, that you simply turn on tiered for 2-3 months, and then measure your effective commission over the types of trades you actually execute and see what the fixed commission equivalent is.  My guess if that tiered is best for most everyone.

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