Didn't know that specifically about Vanguard but it doesn't surprise me. My understanding is that PFOF is now widespread among brokers who compete in the no-commission trade space. We want and enjoy cheap trades so we must expect that companies will find a way to generate revenue to make up for commissions.Actually, Vanguard Funds uses PFOF. With PFOF you might be able to reduce trading costs to below zero. That is, below your commission costs, below the bid/ask spread.Payment for Order Flow (PFOF) is how Robinhood (and other more mainstream brokers) is able to offer low/zero transaction costs. But the costs to small retail investors like me per transaction is microscopic (fragments of a penny, I'm told). I remember the first time I bought a vanguard fund at fidelity. It was something like $75 fee for a buy of a few thousand dollars. PFOF seems like a reasonable trade-off to elimate the more significant friction of high transaction costs.
Now philosophically, PFOF is another "great innovation" that we could discuss. It adds some opacity to how markets operate. Some would argue "inefficiency." The flipside is that buyers and sellers are identified quickly and transactions are processed smoothly. It is probably a major reason why zero fee trades became accessible in the first place. For small investors trading high volume securities (someone like me trading VOO or VTI), the financial penalty applied because of PFOF is probably so low that its not worth dwelling on.
If I was buying and selling several millions of dollars of a single low volume stock, yes PFOF might hurt me. But it also might help me. Just because my order is preferentially routed to a specific market maker doesn't mean that price will be inherently bad. But I'm not that guy, so I don't worry about it.
For buy-and-hold index investors PFOF is a pretty good trade off I think. I don't know all the details, but market-makers play an important roll in how trades are executed quickly and efficiently in the modern electronic market. Essentially a middle-man between buyers and sellers. Helps my little VTI limit orders go through quickly. Of course they take a tiny cut. And they pay a little back to the broker in exchange for the business. I lose a teeny-tiny bit. But I don't have to pay commissions and I generally get my limit orders filled so I got nothing to complain about.
Everyone wants the sausage but doesn't want to see how the factory works. I find this stuff really interesting.
Statistics: Posted by folkher0 — Fri Sep 27, 2024 8:05 pm — Replies 79 — Views 5142