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What is removing liquidity???

13731 Views 1 Reply 2 Participants Last post by  Robillard
I was thinking about starting a TFSA at Questrade and read some of the fine print regarding "removing liquidity" and extra charges of 0.0037 per share.

Can someone explain this to me ?

Am I going to get nasty surprises? I do mostly put limit orders in which I think adds liquidity but.... now I'm worried

Other than this I would save a lot by transfering over
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In the US market, most ECNs (electronic communication networks) on which a lot of trading is conducted offer credits for adding liquidity and charge a fee for removing liquidity. It should be noted that these fees are levied by these market centres, and not your broker. (Switching brokers won't really help.) Your broker has to collect these fees from you and pass them on to the ECN. The ECN, in turn, pays portion of the liquidity removal fees to the participant that added liquidity as a credit to their account.

Removing liquidity is what happens when you opt to trade right away, i.e., by buying at the offer price or selling at the bid price. The liquidity in the market is created by market participants willing to wait for their order to be filled by placing limit orders outside of or at the current bid and offer prices. So when you opt to trade immediately with the participants that have placed such limit orders, you are making the market less liquid by eliminating orders with which others could have traded.

ECNs have this fee structure in order to reward participants that add liquidity on their system. The fees are generally in the range of 30 cents per 100 shares to remove liquidity and a typical credit is in the range of 20 cents per 100 shares to add liquidity. There's no real way to get around this except to direct your broker to route your order to a market centre with a different fee structure (if you can find one). Even then, you might not be able to avoid the liquidity removal charges since all of the ECNs in the US are interconnected and are required by Regulation NMS to route orders to each other if another market centre has a better price. In Canada the TSX and local ECNs supposedly have a similar fee structure.

The only surefire way to avoid liquidity removal charges is to always add liquidity. The easiest way to ensure this is to have access to a level 2 quotes, or an order book viewer, so that you see the market depth increase when you place your order. Of course, for this to work, you have to know which ECN to which your broker directed your order. It also helps if you never use market orders (which is a good idea regardless).

My advice is, unless you are a very active trader, you should just pay the fees and not lose any sleep about it, since liquidity removal charges generally pale in comparison to expensive brokerage commissions.
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