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How to invest

Payment for order flow—What you need to know

3 minute read
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February 10, 2022
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How much are you paying to trade? It may be more than you think. Even if your brokerage platform doesn’t charge you commissions, there are still expenses associated with trading. One of those expenses is payment for order flow—and it may be affecting your bottom line.

What’s payment for order flow (PFOF)?

When you enter a trade, your broker passes the order to one of many market makers for execution. The market makers compete for this order flow because they can earn a profit through the spread between the securities bid and offer price. PFOF is the compensation a broker receives from a market maker in return for directing orders to a particular destination for execution. Essentially the market maker is sharing a portion of the profits they earn from making a market with the broker who routes the order to them. This payment typically amounts to a fraction of a penny per share on equity securities.

Why everyone’s talking about it

PFOF has been around for years, but the recent rise in low-fee trades and digital trading platforms has made it a hot topic in the media and with regulators and policymakers.

What’s Vanguard’s PFOF philosophy?

In short, we don’t pay for order flow.

Our approach is rooted in our “client first” philosophy and our drive to maximize investment outcomes, guided by our 4 keys to investing success: goals, balance, costs, and discipline. We encourage you to focus on things you can control and make decisions that will benefit you in the long term. While we don’t advocate frequent trading or market-timing, we do support investing in many forms and feel that trades should be executed with investor-first practices.

Since there may be times a trade benefits your portfolio, we offer a platform designed to help you get the best price on trades. In addition, we offer a robust line of products and education on each investment type. We also follow "best execution" practices with our trading partners to keep costs low, and we don’t get incentives when you trade. (Be cautious of firms urging you to trade often, as this practice may be lining someone else’s pockets.)

We consider ourselves caretakers of your investments, and that permeates every decision we make.

Vanguard trade quality

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Vanguard funds not held in a brokerage account are held by The Vanguard Group, Inc., and are not protected by SIPC. Brokerage assets are held by Vanguard Brokerage Services, a division of Vanguard Marketing Corporation, member FINRA and SIPC.