Proprietary Trading Midpoint Strategy

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Midpoints have become an integral part of trading and particularly scalping. While using
midpoints can be incredibly advantageous, it can also be quite dangerous and costly. Although
every trader will have a slightly different strategy in using midpoints, there are certain key points
which should be followed. Knowing when to use midpoints to get into a position, to get out of a
position and when to use which ECN is essential to being a profitable midpoint user.
Midpoints are orders executed in the middle of the NBBO. If a stock is trading at
4.21/4.22, the midpoint executions would be at 4.215. Although midpoint orders are hidden and
thus cannot be seen on the Level II, the executions can be seen as white prints on the TAS (can
be set as another color if desired); the letter of the white print indicates the ECN the midpoint
was executed on.
Using midpoints can be more dangerous than only using full penny prices while scalping.
The main danger is the potential inability to close a trade flat if the stock or market turns against
you. For example, if getting long at the bid and the stock then looks like it will go down, you can
then hit the bid to close your position with no gross loss. If getting long midpoint when the stock
turns, however, it is not always possible to get out at the midpoint and it may be necessary to hit
the bid, resulting in a loss of half a spread.
There are certain market and stock conditions where midpoints can be used and where
they should be avoided. The ideal stocks to use midpoints are very liquid stocks trading
within a very small range. The main advantage to using midpoints is to cut the line on ECNs
that are present on the full penny of very liquid stocks. For example, you might be waiting
behind a million shares to get long at the bid but only behind ten thousand shares to get long at
the midpoint. On stocks with low liquidity and thin levels, however, the need to jump the line
does not exist since the line is much smaller. The same can be said for volatile stocks, where not
only do the levels tend to be thin but where the stock can change direction much faster and much
more violently, making midpoints immaterial.
Although the most common midpoint ECNs used changes day to day depending on
where the volume is, in general there are certain ECNs that have the best fills at midpoint:
Route  Cost  TAS  Advantage/Disadvantage
SMARTMID  $1.50 fee, A or R  D  Ad: Great fills. Not FIFO so one doesn’t  have to
wait in line. The larger the order, the better the fill.
Can often get some fills just before the level breaks.
At times will have part of order executed at a price
better than the midpoint.
Dis: More expensive mid.
ARCAMPLA  $1.50 rebate  P  Ad: Good rebates. Decent volume.
Dis: because of cost to remove on ARCA, rarely fills
unless there is doubt as to direction of next move.
Also, since add only, can’t always tell what side
midpoint P prints are hitting.
NSDQBX/S  $0.40 fee to A
$0.20 rebate to R
B  Ad: Very cheap. Good volume. Good order flow on
Dis: No real rebate. Lot of shares posted on mid so
may take time to get filled even if printing mid B.
Sometimes can get hit full price Boston if not
blocking with mid.
EDGA/S  $1 fee, A or R  J  Ad: Good fills at times. Better order flow than
Boston but less people on midpoint because of cost
so wait in a smaller line.
Dis: Cost. Like Boston can sometimes get hit full
price if not blocking with mid
Other ECN’s can at times fill very well but in general are used less for differing reasons:
Route  Cost  TAS  Advantage/Disadvantage
BYXONLY  $0.50 fee to A
$0.30 rebate to R
Y  Ad: Cheap. Decent volume. Not used as much so
waiting behind fewer shares to get filled.
Dis: Doesn’t yet have the order flow that the other
cheap ECN’s have (EDGA/Boston).
BATSALIQ/S  $2.00 rebate  Z  Ad: Great rebate.
Dis: Rarely get filled when stock going in the right
direction. If get filled, often could have gotten full
price instead. Also, like ARCAMPLA, since it is
add liquidity only, can’t always tell what side
midpoint Z prints are hitting
FLOORMID  $2.00 fee  D/N  Ad: Good fill rate. Simultaneously acts as midpoint
and as NYFB/ALGO order to get shares of N prints
on full price.
Dis: Expensive. With automated cancelling on the
floor the cancel rate is fast but still not as fast as
NASDAQ  $3.00 fee to R
$1.00 rebate to A
T/Q  Ad: At times has great fills with a rebate to add.
Dis: Unlike ARCA and BATS, the add liquidity
only route does not exist so have to be careful not to
remove due to fee. When level breaks, can get full
penny price with removing (so same as paying $3 to
hit aggressively).
As will always be the case, every trader will use different indicators to decide when to get
in and out of trades. The added danger of midpoints makes it even more important to properly
decide the entrance point for a trade.  Deciding to use midpoints too early may result in the trade
going against you while you may not get filled if you wait too long.
Since there is higher risk to using midpoints while scalping, there should be a higher
certainty of the stock moving in the desired direction. Do not use midpoints if the bid and offer
on the level 2 are the same size and the T&S is printing both sides. While it may be common
practice to place orders on the bid or offer while the level 2 is fairly even, midpoints should not
be used in the same manner. You should only place a midpoint order if the side opposite of the
trade is small and being hit; as an example, only try to get long midpoint if the offer is small and
the majority of prints on the TAS are hitting the offer.
Another key point is to not use midpoints to get in when there is a realistic chance to
get the full price. In other words, do not try to get long midpoints when you have a reasonable
chance of getting long at the bid. If you see that an ECN on the bid is being hit, put an order on
that ECN and see if you can get filled instead of settling for midpoint. The grey area here is the
definition of “realistic,” which every trader must define for themselves.
Deciding when to use midpoints to get out is also important in order to minimize losses
and maximize profits. The decision on whether or not to use midpoints as an exit strategy can
depend on the point of entry of the trade.
One example is when you are already in a position at the midpoint and have to decide
whether or not to get out flat. This decision should be based on the factors that lead to you
getting into the position at midpoint in the first place. If the underlying indicators that made
you take the position change, do not be afraid to flat trade using midpoints. For example,
you got short at the midpoint because the bid was very small and that the TAS was constantly
printing at the bid; then all of a sudden the bid gets big and the TAS starts printing evenly
between the bid and the offer. Since the reasons for the original trade are gone, it might be a
good idea to get out flat rather than risk the stock reversing, forcing you to take a loss. Of course
once you flat trade, if the original indicators reappear, there is nothing stopping you
entering your position again. So if you got out flat at the midpoint and then the bid becomes
small again and the TAS again starts constantly printing at the bid, you can always try to get
short at the midpoint again.
The same strategy should be used even if you are filled at the full penny. For example,
you managed to get short at the offer because your indicators told you the stock was going down;
if the indicators were to disappear, getting out at midpoint would allow you to take a profit
instead of flat trading and paying fees by hitting the offer if the stock breaks up. Unlike the
previous example where the position was entered at midpoint, however, you would still have the
option of hitting the offer to get out flat if the stock reverses. In this case, some traders chose to
take out some of their position at midpoint to take some profits while keeping some of their
original position in case the indicators return.
As a trader, you must find a balance between taking profits right away and risking some
profits to make larger gains. Nowhere is this more apparent than in using midpoints to get out of
profitable trades. Although the use of midpoints can help you take some profit immediately, if
the indicators that lead to you taking the trade are still present, using midpoints can
actually reduce the profitability of a trade. Each trader must create their own balance of using
midpoints to take profits quickly versus waiting and risking some of those profits for larger
Unlike full penny orders, midpoint orders cannot be placed before the desired price is
within the NBBO. For example, you cannot place an order to get long at 4.215 while a stock is
trading at 4.22/4.23. This offers some great opportunities under the right circumstances.
One way to take advantage of this is to place an order immediately after a level breaks.
Although this can be very dangerous, it can under specific conditions be very helpful. An
example of this is when a stock is simply going back and forth between two levels without
hitting either of the extremes; a stock is keeps going from 4.21/4.22 to 4.22/4.23 and then back
again, barely hitting 4.21 or 4.23. Placing orders long at 4.215 as soon as the level breaks and
short at 4.225 as soon as it breaks back can lead to some profitable trades under otherwise
impossible trading conditions.
Managing fees is always important and is imperative when using midpoints. The best
way to keep fees at a minimum while using midpoints is to use different ECNs under different
The most expensive midpoint route used on a regular basis is SMARTMID. Although
this ECN often offers the best fills, this must be balanced with the expense. Some traders chose
only to use SMARTMID if they can instantly get out for a half spread profit, i.e. if the level is
almost breaking. Being forced to flat trade with SMARTMID can become very expensive and
cancel profits from other trades. As long as there are other ECNs printing at midpoint, you
should not use SMARTMID.
The key to managing midpoints is to watch the TAS and to figure out the cheapest way to
enter the position. If there are a lot of Z and P midpoint prints, try making credits. If it is
impossible to make credits but there are a lot of B or Y midpoint prints, get in for a small fee.
EDGA and SMARTMID and other expensive ECNs should be the last resort to get midpoints
and there should be very high certainty that the stock will move in the desired direction or at a
minimal that you can get out making a half spread profit.
There are a few other important factors to consider when using midpoints. One advantage
is that at times you can get “miracle” fills where you can take an instant profit. If you place
orders on the midpoint, particularly on SMARTMID, as the level is breaking, most of the time
your order will remain unfilled; however there are times where you may get tens of thousands of
shares at the midpoint right before the level breaks.
Midpoints can also be used as an indicator instead of as a way of entering or exiting a
trade. Seeing where the midpoints are filling and the rate of fills can indicate whether or not there
are buyers or sellers. Although sending an order of a hundred shares will tell you very little,
having an order of ten or a hundred thousand shares filled right away tells you quite a bit.
Perhaps the most important thing to remember when using midpoints is to not ignore the
full penny. As mentioned when discussing when to use midpoints to get out of a trade, they can
actually reduce the profitability of a trade.

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