As of November 2022, Wealthsimple may receive Payment for Order Flow (or PFOF) on US-listed securities and options. This means that Wealthsimple may earn a rebate for routing clients’ orders to a market maker for trade execution when handling orders for U.S. listed stocks and options contracts.
Wealthsimple does not receive PFOF on securities that are listed in Canada, securities that are listed in both Canada and the US (or “inter-listed securities”), or options listed in Canada.
What is Payment for Order Flow?
Payment for Order Flow (PFOF) is a form of compensation, usually fractions of a penny per share, that a brokerage may receive for sending their orders to entities known as market makers. PFOF is common practice in the industry.
Who are market makers and why do they pay for order flow?
A market maker refers to a firm who actively posts bids and offers on a particular security in the market and buys and sells securities for its own account. In some cases, market makers will compensate brokerages for routing orders to them, otherwise known as Payment For Order Flow.
Market makers earn revenue by taking on the short-term risk that they can sell a security at a price higher than they bought it, and vice versa. The difference between the price at which a market maker buys a security and sells it (or vice versa) is known as the spread. The spread is subject to price risk—meaning that the firm could lose money if the stock’s price moves in an unfavorable direction compared to the position they hold.
The amount earned by market makers is often as small as a fraction of a penny and it compensates them for providing liquidity to the marketplace for retail investors, regardless of market conditions. However, these tiny profits on smaller orders add up, making it worth paying retail brokerages to have trades sent their way.
What happens when you place a trade on Wealthsimple
When you place an order with Wealthsimple, it is automatically sent to an executing broker.
- That executing broker may decide to send the order to an exchange, or if acting as a market maker, can decide to fill that order themselves: The market maker executes the order internally rather than sending it out to an exchange. If the Executing Broker, acting in the capacity of a market maker, decides to fill the order from their inventory they may provide price improvement on that order. Price Improvement means the order will be filled at a better price than what is available in the market at the time the order is sent.
- This executing broker is not selected based on the size of the compensation they are willing to offer Wealthsimple. Wealthsimple has an obligation to provide the best execution possible for your order. You can learn more about how best execution is determined here.
- Once the order is executed, Wealthsimple receives the filled order from the executing broker and passes it back to the client.
- Wealthsimple may receive compensation for directing orders to that Executing Broker, in terms of fractions of a penny per share. This is what is known as Payment for Order Flow or PFOF.
Why Wealthsimple accepts PFOF
There are two main reasons why Wealthsimple accepts Payment for Order Flow:
1. It helps Wealthsimple keep our fees as low as possible
Wealthsimple aims to deliver the best-valued products to our clients, and a big part of that value is keeping fees low. There are a number of costs associated with trading securities, and PFOF helps us offset those so that we’re able to continue providing a reliable, commission-free trading platform for Canadians.
2. It allows clients the potential for Price Improvement on their orders
In routing an order to a market maker instead of directly for execution on an exchange, the Market Marker may decide to fill the order from their inventory and provide price improvement on the order. Price Improvement means the order will be filled at a better price than what is available in the market at the time the order is sent.
How Payment for Order Flow impacts my trades
Payment for Order Flow has no impact on you as a client or how your trade is executed.
Both Wealthsimple and our executing brokers have an obligation to obtain the best possible execution for our clients. We have always prioritized transparency with our clients across all of our products and services, which is why our best execution policies and processes are publicly available to ensure our clients feel confident about how their trades are executed.
Frequently asked questions
Can I opt-out of having trades included in PFOF?
PFOF is a common practice between trading platforms and executing brokers. Clients are not able to opt-out. Most Canadian brokerages accept PFOF on U.S. orders.
Why didn’t you accept PFOF before November 2022?
Enabling PFOF on the backend requires time and resources as there are many different entities involved. We balanced this against other business priorities.
What happens to the rebate that Wealthsimple receives for accepting PFOF?
While compensation is not guaranteed, any rebate Wealthsimple receives from executing brokers reduces the trade execution costs for Wealthsimple Investments Inc. (WSII). It does not accrue in client accounts.
Are you charging me more for my shares because you take PFOF?
No – there is no impact on you now that Wealthsimple accepts PFOF. PFOF does not result in any additional charges for you.
Why is there controversy surrounding PFOF?
Historically, PFOF has been criticized for creating potentially unfair or opportunistic conditions at the expense of retail traders and investors. However, the U.S. Securities and Exchange Commission (SEC) permits brokerages to accept rebates on U.S. trades and many studies have been done on this practice.
Are my shares at increased risk because you take PFOF? Will I be able to sell my shares whenever I want, at the best price available?
There is no impact on you or your trading experience. You will still be able to sell your shares during regular trading hours and your trades will be held to our Best Execution Policy.
How do I know that Wealthsimple is keeping investors' best interests in mind now that you are receiving compensation from routing orders?
We have a regulatory obligation to you as our client to achieve best execution when acting for a client.
Who are the executing brokers that Wealthsimple works with?
Wealthsimple works with several brokers. Orders are routed to an executing broker who either routes the trade across the many different exchanges based on the best price available to clients at that time, or if it’s a US-listed security, could act in the capacity of a Market Maker and decide to fill that order themselves.
Is PFOF considered “selling information”? What other information of mine does Wealthsimple sell?