Markup when buying stocks vs realtime price

(G M) #1

I just bought some US stocks and noticed that there is a very noticable markup vs the realtime price from Yahoo/Google Finance (after including the 0.45% FX fee) when looking at the contract. The real price + FX fee never went above the price that I was charged on the contract. Any reason for this?
I’m an Alpha user and I also have been charged £1 for every trade, but I assume this will be reimbursed soon?

(G M) #2

E.g.: GOOG price stayed between $1136.24 and never went above 1136.5 for many minutes. Freetrade itself never went higher than 1138.3 which is reasonably close.
But I was charged 1151.09 (a 1.3% difference per share)

(Alex Sherwood) #3

Here’s why there’s sometime a difference between the price that you see in the app / on a site like Google Finance & what you pay -

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.

quote from the ‘How do Freetrade’s orders ‘execute’?’ blog post

When we process your order, we’re required to give you ‘best execution’ by the regulator. You can see our order execution policy here & read more about how we handle your orders here -

To clarify, this isn’t a fee, it’s the rate that we use to convert your currency when you place an order.

I hope that helps!

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(G M) #4

I’m aware of spreads, but these are much higher spreads than what I’m used to seeing for buying some of the most liquid stocks on the market. The spread seems to be between 0.5% and 1% on top of the FX loss. I was expecting a spread close to zero for most of my trades.

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#5

What time did you execute your trade? And exactly which stocks?

I also asked the same question over the weekend about whether freetrade widens the bid/offer spread. Appreciate that it was over the weekend so the team probably haven’t seen it yet.

(Alex Sherwood) #6

I’ve just answered this here for you - Do you widen your bid/offer spread?

(G M) #7

I used instant orders for e.g. Google and Microsoft. I.e. stocks that are part of the most active stocks in the world, a 1% spread would be more likely for smallcaps.

#8

The theory is sound, but is the implementation? Is there someone actively checking for bugs, especially in the US-related code, which is less tested in the wild?

Freetrade undertakes to monitor execution performance for compliance with this policy

Is your monitoring currently in place? Is it comparing the prices you end up charging customers with the “good” prices from the LSE order book, and are they always within an acceptable distance? What do you consider acceptable?

Since you use an LSE market maker for US stocks, are they just generally overpriced compared to, say, going to a US-based market maker? Is that why there have been multiple people making this kind of complaint on the forum, but only for US prices?

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#9

Can you share the exact time it was executed and the exact ticker as Google has a few?

I’m curious as i work in markets myself and a few things do not add up about freetrade’s model (YET!)

(G M) #10

Wasn’t aware that FT buys GOOGL instead of GOOG, I always had the non-voting shares before (GOOG).
There’s a small premium that explains most of the difference I noticed but not all.
Need to look into the other stock spreads tomorrow.

(Alex Sherwood) #11

I’ve had a chat with our team today & wanted to share some more details about how we monitor our prices and make sure that we our delivering best execution for our customers.

We use a third party service that receives data about our trades and compares it to the UK & US markets at that time. We then analyse this data regularly to check that the prices are what they should have been.

If you have any queries about specific orders, you can always message us via the app and we’ll check on them for you.

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(Vladislav Kozub) #12

On what basis do you make judgement whether the prices are what they should be or not? Is that a manual or an automated process? :slight_smile:

I only asked because I was not quite sure what Freetrade’s involvement in the execution process is. I was under the impression that you send your orders through the exhange, as a member firm, and market makers facilitate them without your further involvement.

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(Alex Sherwood) #13

To add a bit more detail to my previous comment, the service that gives us the comparison of our prices vs the market prices enables us to make sure that the price that was paid was close enough to the market price at the time, if that makes sense.

The reporting is automated but we do some manual analysis and investigation too :face_with_monocle:

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(Simon) #14

I suppose the question is what is Freetrade’s definition of ‘close enough’. Thank you so much for all this extra information and transparency Alex!

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(Chris) #15

There a couple of things at play here that most people might not appreciate or even be aware of.

Firstly, most prices will mention they are ‘realtime’. The ‘realness’ of this data can vary from 5ms to over 30sec - A lot can happen in this time. I work for a company that pipes market data at the lower end of that range and it matters a whole lot to the people who need it. Most retail investors are likely getting delayed data in some way, although the delay is probably quite small.

Secondly the ‘price’ is only indicative of the last trade that took place - its not uncommon that prices can vary by 1%+ inbetween trades that are happening, thats the very nature of an open market and supply/demand.

Thirdly is the way retail investment trades happen - via market makers. I am about to over-simplify this so please don’t anybody jump down my throat here…
… market makers are what really allow the markets to operate - they allow professional/institutional investors to complete trades. Example with simple numbers below,
Imagine fund manager A wants to buy 1000 shares of JPMorgan. Now the broker finds a seller will to sell but normally the matched seller doesn’t have the exact number of shares to sell (1000 in this case), lets just assume they only have 900 to sell - the broker needs to find another 100 shares for his client. A market maker enters to match that 100 shares - they do this by collecting up lots of smaller transactions (normally but not always) from retail investors - this makes up the 100 shares and the trade can be completed. However in this case the price is driven by the original buyer and seller, eg what they are willing to buy and sell at - the market-makers have very little say in the price due to the lower amount of buying power they have - of course the market maker can refuse the transaction.

Like most retail stock brokers, Freetrade use the same networks of market makers to complete trades. Our transactions are typically (not always) tagged onto much larger deals - so our price is largely a result of the larger transaction at play rather than anything else. The ‘markup’ as suggested by the OP is the natural impact of how the markets work. For note, there is a tiny markup that market makers take but it is so small I highly doubt that anyone of us would ever be impacted it - Freetrade may even absorb that cost on their side.

For note, ALL retail stockbrokers use this method - they are just not open about it. Freetrade have been remarkably open about this in their terms. It genuinely isn’t anything to worry about to be concerned by - if the tiny variances in price really matter to anybody then retail investing probably isn’t for them.

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(Simon) #16

Thank you so much - this is a great explanation for a novice! :slight_smile:

(Giridhar Tammana) #17

My understanding in simple terms is, market makers collect spreads (difference between bid and ask).

As per http://marketswiki.com/wiki/National_Best_Bid_and_Offer
one should get price no more than best ask price at the time of trade execution.

So if we roughly now when trade has happened we can arrive maximum and minimum prices for a trade could have been executed (if the trade size is small).

For liquid stocks like MSFT I think 0.5% spread is very high.

(Chris) #18

How market-makers make their money is a contractual issue between Maker & Broker. Spread is the most common way but not the only way. This is getting into the weeds a little bit and I’ll soon be out of my depth, but given that Freetrade don’t charge us a fee, they have no fee to pass onto the Maker - therefore the spread is the only point of remuneration for the Maker. Given this is a contactual obligation I highly doubt we will ever know this, it isn’t fair to expect Freetrade to disclose their contractual obligations/commitments with their supplier in the same way you wouldn’t expect Tesco to disclose their wholesale price for bottles of Coca-Cola.

However, its important to point our here that 9/10 people in 99/100 trades will be MATERIALLY better off under Freetrades’ model than under a traditional model.

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#19

1+2, Agree that there is a time delay for most retail investors, so the current ‘live’ price isn’t really live. However, you can use public data to work out the (roughly) MID-MARKET price traded at a certain time in the past.

2, 1%+ isn’t normal in quiet market. On a day with a lot of data or news coming out then yes, everything can drop 50%, who knows. But if nothing is happening the price isn’t gonna move by 1%+ within a few minutes for the most liquid stocks.

3, I see your caveat so i’m hopefully not gonna come across as jumping down your throat :slight_smile: just to clarify rather than contradict here

A market maker isn’t there to match seller and buyer exactly, not at all time anyway. If that was the case, it would be the easiest job ever. Market makers manage risk by making prices. They will give you a price at which they are happy to take on the other side of your trade. That’s why there is liquidity in the market even when there isnt simultaneous selling and buying.

So i would say that a market maker has a lot of say in the price.

4, Yes most retail stock brokers like Freetrade send it to a network of market makers. However, my experience using some other brokers is that you are shown a live price and have 15s to execute. Of course for this privilege they are charging you up to £15 a trade so i’m not arguing that this is better for most Freetrade users. The potential issue here is that, the trades that are currently instantly executed through freetrade, you take the price offered to you. If i’m a mkt maker and i see Freetrade’s trades during the day, i will know that i don’t really have to show a very competitive price to win the trade. This is why it is important to have control in place to monitor best execution.

if the tiny variances in price really matter to anybody then retail investing probably isn’t for them.

Overall i would say it is very very important that people are aware of the total costs of their transactions. In this low yield environment, pissing away 1% in transaction cost where the bid/offer spread is sub 0.1% isn’t OK. It seems like it wasn’t the case for OP in the end but i think OP and others should be encouraged to look into their costs in any case.

A simple 5’ read for anyone who cares

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(Chris) #20

Nope that’s all right by me. I was just trying to abstract away some of the behind the scenes noise for people.

I definitely agree with people being aware of their transaction costs. For someone who’s paid thousands over the years I’m aware of how much it bites in