How do Freetrade’s orders ‘execute’?

Freetrade Team

February 7, 2019

Freetrade Team

With more and more customers on the app, we thought it’d be a good time to give more clarity on how our orders/trades get placed and filled.

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With more and more customers on the app, we thought it’d be a good time to give more clarity on how our orders/trades get placed and filled.

Our execution policy has all the detail on this but we know most people don’t have much enthusiasm for reading through long policy documents, so we thought something shorter would be useful too.

Let’s set the scene!

You just got full access to the app and now have the world of Freetrade at your fingertips. You’ve been waiting to buy that stock you’ve had your eye on and now you just have to tap that beautiful indigo ‘Buy’ button. Exciting!

But what happens next?

Well, after that tap, your order goes through a process called execution. Don’t worry, it’s less scary than it sounds.

Execution and how it works on Freetrade 💸

It sounds a little aggressive but execution is basically just agreeing the deal for the trade between a buyer and a seller.

Freetrade is an execution-only stockbroker. That means we only follow our customers’ instructions to buy and sell stocks on their behalf. We always seek best execution for our customers.

This encompasses a few factors but generally it means the best price we can get quickly for your order size, with a high likelihood of executing successfully.

Again, you can check out the nitty-gritty in our execution policy here.

In today’s capital markets there are a lot of different places to trade stocks, so a big part of best execution is deciding where we direct your trades to be executed.

So where can it go? 🤔

Originally, trades could only be executed at big exchanges like the London Stock Exchange or the New York Stock Exchange. Basically, name a big city and you might find an exchange.

About 10 years ago there was a big increase in competition in the exchange sector. Electronic trading platforms like Turquoise, BATS and Chi-X (aka multilateral trading facilities) were started up to challenge traditional institutions like the LSE. This increased competition has brought down transaction costs and made markets more efficient.

Other participants have emerged, too, like high frequency trading firms and dark pools. Startup exchanges like Aquis and IEX are the newest kids on the block.

Essentially, we’re now in a world where investors and stockbrokers have huge variety for where they can execute their trades.

Where Your Trade Goes ⚡️

At the moment, when your Freetrade order successfully completes the venue ID on your contract note will read: London Stock Exchange. This ID could mean two things:

  1. Your trade was placed on the LSE order book itself and matched with a counterparty. This is known as an order-driven market as all the bids and asks are displayed, which is great for transparency. This is the norm for trades above a certain value between certain parties (usually institutions), but there is no guarantee that someone is willing to take the other side of your trade and successful execution is much less likely for small orders (i.e. from individual investors).
  2. Your trade was placed with an LSE market maker, aka a Retail Service Provider or RSP. This is known as a quote-driven market as the market maker will provide a firm quote to take the other side of your trade. This is the norm for smaller ‘retail size’ trades.

Most of our customer orders are at a suitable size for option 2. That means we take your order for e.g. 10 shares of Barclays and ask the network of LSE market makers to provide a quote. We then choose the best price that can be executed quickly.

Sometimes trades can get rejected because the price quotes we get back from the market makers aren’t good enough based on the observable prices against big orders on the LSE order book.

This is part of our commitment to best execution, a regulatory requirement for execution-only brokers. ❤️

What about US stocks? 🇺🇸

We send our orders for US stocks to an LSE market maker. When the market maker sends us the prices for US stocks, the conversion from dollars to pounds is baked into the price.

We don’t control the exchange rate — we just pass it on to our customers.

Currently, the rate we get is the spot price + 0.45%. We display that in the order confirmation screen on the app and our pricing schedule, and we pass that rate directly to you.

As we add more execution venues we’ll have more control over the FX conversion and should be able to offer better FX rates.

The Spread 👐

The single stock price you see for a stock in the Freetrade app, on Google Finance or in the newspaper is generally not the price that you can actually buy or sell a stock at.

There’s always a spread: the difference between what someone is willing to buy a stock at (bid) and what they are willing to sell at (ask).

The more efficient the market, the tighter (smaller) the spread.

The market maker business model means offering bids and asks on many stocks, always willing to buy or sell at some price. They make money from the difference between these prices.

We, on the other hand, never make money from the spread or include hidden commission baked into the spread.

How we’ll improve our service further💪

As we grow and our trading volumes and stock universe increase, we’ll greatly expand the venues available for customer orders.

Our guiding light is where we can get our users the best prices and the best chances of successful execution. We want to drive down costs as much as possible for our customers.

We’re on a mission to bring fee-free investing to Europe and beyond. 🔥

Important Information

This should not be read as personal investment advice and individual investors should make their own decisions or seek independent advice.

When you invest, your capital is at risk. The value of your portfolio can go down as well as up and you may get back less than you invest. Past performance is not a reliable indicator of future results.

Eligibility to invest into an ISA and the value of tax savings depends on personal circumstances and all tax rules may change.

Freetrade is a trading name of Freetrade Limited, which is a member firm of the London Stock Exchange and is authorised and regulated by the Financial Conduct Authority. Registered in England and Wales (no. 09797821).

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