Do Freetrade make money on the spread? Do Freetrade widen their bid/offer spread? The answer is: NO

A question to the Freetrade team. Who do you execute your trades with at the end of day and do you widen your bid/offer you receive when it’s passed on to users?

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We execute our trades with the Retail Service Provider (RSP) network.

Longer explanation

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. :+1:

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. :heart:

(Quote from this blog post)

As we write in our Order Execution Policy:

We’re committed to taking all sufficient steps to achieve what is known as “best execution” for your orders.

No we don’t :innocent:

Also:

We never make money from the spread or include hidden commission baked into the spread.
(Quote from this blog post)

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This is not correct. I have been looking at different trades that I placed with Freetrade and checking markets trade. There is definitely difference to spread

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We’d be happy to look into any queries that you have about your orders for you, just drop us a message via the in-app chat.

But to clarify, our policy hasn’t changed and we don’t widen the spread.

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Check the contract note, I thought the same at first but then saw the exact rate on the contract note with the unrounded rate.

Hi,

I noted that when I buy an US stock from freetrade I almost always pay 1% more than the price displayed on both freetrade app and google (the latter is more frequently updated).
How does it work exactly this spread? Is there a way to predict it?
This is the main reason why I always go red shortly after a bought.

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The price displayed is the mid-market price. There’s a difference between the price people are willing to pay and what people are prepared to sell for. That’s the bid-ask spread, it varies by stock depending on its liquidity.

Freetrade also charge 0.45% for foreign exchange, so it could be that.

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Thank you.

Have there been any changes recently?
I remember I was luckier 2 months ago.

Hey, see the answer from Alex above: it should answer the most general questions around the spread. If you have a specific trade we can look into, please ping us via in-app chat. :+1:

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this :point_up_2: @Stefano @Han

:clap:

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Another feature request; many decent trading apps have this: bid and ask prices (indicative) - can we see them? It’d require a revamp of UI.

But when bid-ask widens it can indicate some sort of risk (less liquidity). Stake and Degiro show those and it helps, T212 probably too. Standard features should come as standard.

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Although it’s clear that you don’t make money with the spread, it’s not clear how orders are executed. It has happened that I wanted to buy 10 shares at 10p and actually got 9 at 11p (see example below). Wouldn’t it be easier if we could:

  • set a price above which we don’t want to make the trade
  • set a price and wait until the market settles at that position (accepting the likelihood of waiting… forever).
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0.1717 is about 7% higher than the 0.16 I WA expecting.
Round-ups are also very confusing

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We’ve written copious amounts about the current volatility and spreads in the market: blog posts, a newsletter, forum answers, etc. We might pin something on top of the forum though or something similar, so it’s crystal clear.

This is called a limit order, and it’s been in the roadmap before the current volatility. The current status is customer testing the design (the Freetrade team saw a demo on this week’s all hands - it looks :heart_eyes:).

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Hi @Viktor, it wasn’t a complaint, but more a suggestion. The point is that, if I know that I had to buy at a price that is 7% higher than the current market price (or, 3%, or 15%), I might want not to make the trade instead. Transparency must be crucial for your company - and I’m sure it is :slightly_smiling_face:

You can expect many others being frustrated if what happened to me happens to them. No matter what the online documentation about it is, as most customers won’t search for it and might complain to customer support or put a bad review on your app. You want to avoid it.

Is there a rule like “we don’t execute the trade if the price is more than 5% higher than what stated when making the order”?

I think you’re missing the point. I don’t want live prices. I’m not saying that I only want to trade at the latest price. I accept that it can be higher. But as I said:

  1. It would be good if there was a limit to the order. A loss of 7% at purchase seems too much to me, it’s a return you expect in years.
  2. I still think that the process is misleading. If I reserve 10 £ for 10 shares, I expect that the maximum price per share is 1 £. So although I have the money to get 9 shares at 1.11 £, I think that the trade should fail. This is the meaning that “reserved cash” had to me. Now I know I’m wrong, but as I say, I find it misleading.
  3. The fact that there are no limits is quite scary, it feels like signing an empty check. People as me might trust you, many others won’t, especially because:
  4. You can’t expect people to go and check every single trade, compare it to market prices, check liquidity, and see if they’re happy with your trade after it’s been executed.

I do agree with you that limits order might solve this (they won’t tackle the problem but will provide a good and simple workaround). There might be other methods, like showing trade volumes in charts, or a “transaction performance” indicator that tells you how much you lost against the latest price. It’s true that its impact is negligible in terms of money for long-term investors, but it means a lot in terms of transparency. It helps to build the trust for your company.

Be careful, because I think there’s a trade-off between “we want aware long-term focused customers that invest occasionally” and “if customers want to know about products and trades, they have to google it”. Google is my friend. Googling every minute is not.

Hope these thoughts are useful.

To be clear, Freetrade does not execute trades if the price quoted by a market maker is outside the observable bid/ask spread on the LSE order book. So what you’re saying: “The fact that there are no limits is quite scary” is factually incorrect. By the way, this can even lead to order rejections, especially under turbulent market conditions, as experienced by many of our customers during these volatile times.

We’ve written about best execution, market makers and spreads extensively elsewhere so will leave a couple links here and I encourage you to have a look if you have a bit of time:

EDIT: There is a similar thread at Charged completely different share price when buying where we can continue the discussion.

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