Non-Displayed Midpoint Discretionary Order (MDO) Skim
The Formal Definition
An order routing conflict occurring when a broker's smart order router intercepts an institutional or retail limit order with discretionary midpoint instructions, routing it to an affiliated internalizer desk that exercises discretion only to capture liquidity rebates while pocketing the midpoint savings.
Retained Discretion Skim = Realized Discretionary Execution Price - Public Lit NBBO Midpoint
Cole Barrett's Reality Check
The Unvarnished Bottom Line"When you use a discretionary order, you are telling the computer: 'I am willing to pay a little more to get filled.' In an honest exchange, that discretion gives you midpoint price improvement. But when a conflicted broker routes that order to its own wholesale desk, they use your discretion as a profit target: they fill you at the worst price your discretion allowed and keep the midpoint savings for themselves."
Interactive Simulator: Test the Math
Real-World Example: Scenario Breakdown
Examining the real numbers for: Submitting an order to buy 5,000 shares of an equity with an NBBO of $100.00 Bid / $100.10 Ask with discretionary authority to pay up to $100.05
| Execution Metric | Direct Lit Exchange MDO Submitter | Internalized Discretionary Retail Client |
|---|---|---|
| Fee / Rate | $0.0035/share DMA rate | $0 advertised commission |
| Spread / Buffer | Order routed directly to a lit exchange order book with native Midpoint Discretionary Order (MDO) instructions | Broker intercepted the order and routed it to a wholesale internalizer under a PFOF agreement |
| Execution / Status | Matched against an incoming institutional seller at the true $100.02 midpoint ($0.08 price improvement per share) | Wholesaler exercised the client's full discretion, filling the order at the absolute maximum cap of $100.05 |
| Total Cost / Result | Captured genuine midpoint execution on an open lit exchange | Suffered execution degradation from internalized discretionary order skimming |
How Brokers Weaponize This Term
When utilizing discretionary orders, set your discretionary ceiling strictly to the exact midpoint of the NBBO. Never grant discretion to trade beyond the midpoint, as automated internalizers will systematically fill your order at the maximum discretionary price allowed.
Broker Evaluation Matrix
Cole Approves
Interactive Brokers: Provides native direct exchange routing for Midpoint Discretionary Orders, ensuring discretion is evaluated on lit matching engines rather than wholesale dealing desks.
Read Audit →Cole Flags / Avoids
Zero-Commission PFOF Apps: Routes discretionary orders to wholesale internalizers that monetize client price discretion to capture maximum spread profits.
View Trap Details →Frequently Asked Questions
What is a discretionary order?
A discretionary order is an order with a displayed limit price, but with a non-displayed instruction allowing the exchange to execute at a more aggressive price if contra-side liquidity becomes available.
Does a discretionary order display its hidden price to the market?
No. The discretionary price range is completely invisible to other market participants until an execution occurs.