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Order Routing Process

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Schwab’s Order Routing Process

Proactively working to provide you high quality executions is a responsibility we take seriously. To that end, Schwab regularly and rigorously monitors execution quality among competing market venues and looks for opportunities to adjust order routing based on performance trends, technological advances, and other competitive developments.

With Schwab’s advanced order routing process non-directed equity orders are sent to multiple securities exchanges and liquidity providers. These liquidity providers work to improve executions and in many cases provide liquidity that exceeds the size displayed at the current market quote. Schwab is not a liquidity provider in equity securities and does not trade for its own account.1

How Your Orders Are Routed and Filled

The following graphic illustrates how we generally route orders for Regulation NMS securities during regular market hours.2

For more information about where we route orders, please refer to our order routing report (Reg NMS Rule 606).

Step 1: Order

Client (or Schwab representative) enters equity order.

Step 2: Routing

Before sending your order, Schwab’s advanced order router reviews specific criteria such as order type, size, and potential market impact. Orders are then primarily routed in one of two ways, depending on whether the order is “marketable” (i.e. eligible for immediate execution).

Orders Priced for Immediate Execution

Marketable Limit Orders

Orders to buy (or sell) in which the limit price is at or above (or below) the current market.

Market Orders

An order to buy or sell a security at the current price available in the market.

Oversized Orders3

Orders of 10,000 shares (or greater) or for a market value of at least $200,000.

Liquidity Providers

Liquidity providers work to improve executions relative to the National Best Bid or Offer (NBBO) by using capital to execute orders against their own account or by routing to Alternative Trading Systems (ATS), securities exchanges, or other market markers.

Securities Exchange

A securities exchange, an entity that has registered with the SEC, is a marketplace that facilitates the buying and selling of securities among market participants.

OR

Alternative Trading System

An Alternative Trading System (ATS) is an execution platform that brings together buyers and sellers of securities, similar to how orders are matched on an exchange.

Step 4A: Execution

Most orders are executed instantly. Larger orders may be marked for special handling to potentially minimize market impact and obtain a better price.

See how this process may help you save money

Important Routing Considerations

Opening cross orders

Eligible orders that are submitted prior to the respective exchange-opening cut-off times will participate in the opening cross process of the exchange on which the security is listed. The opening cross sets the official opening price for eligible stocks (i.e., the NASDAQ Official Opening Price (“NOOP”) and the NYSE Opening Price). Orders that are executed as part of the exchange-opening cross process receive the same execution price.

Order routing rebates

Charles Schwab & Co., Inc. maintains arrangements with various exchanges and liquidity providers and receives compensation based upon the order flow executed at each destination. Some orders require us to pay associated transaction costs, but most orders result in rebates. Net rebates received by Schwab are used to offset transaction and order processing or handling costs and help us maintain very low commission rates for our clients. Rebate rates are substantially similar among the various securities exchanges and liquidity providers, although they vary based upon order characteristics (i.e., marketable vs. non-marketable).

At Schwab we put our clients’ interests first. Therefore, attempting to obtain the best executions for our clients always takes priority when determining where to route orders. Any eligible rebates from a particular market center are not a consideration in order routing decisions.

For more detailed information about rebates, visit the Arrangements with Market Venues pages of our Order Routing report. (Regulation NMS Rule 606).

Exchange transaction models

Schwab believes investors are best served when their non-marketable limit orders are posted on maker-taker exchanges, and we route such orders to these exchanges directly or to liquidity providers who can post orders there.

What are the two types of exchange transaction models?
Securities exchanges generally have two different payment models to facilitate trading. The most common type of exchange model, on which the vast majority of market volume is executed, is referred to as “maker-taker”, in which participants pay a transaction fee when "taking” liquidity, i.e., sending marketable orders to the exchange, and receive a rebate when posting non-marketable limit orders, thus providing (“making”) liquidity. This model encourages the use of non-marketable limit orders, which promotes price competition and narrower quoted spreads.

Conversely, some exchanges offer an “inverted” transaction model in which the economics of transacting are reversed (i.e. participants pay fees to post liquidity and receive a rebate to take liquidity). These markets are commonly used by sophisticated institutional participants who post orders as part of aggressive trading strategies. Some of these strategies are designed to detect early signals of price movement or large trading interest and depend on advanced data feeds and the ability to rapidly cancel and replace orders. For such traders, under limited market conditions, inverted exchanges may sometimes offer a trading advantage that justifies the additional costs and risks of posting limit orders there, but that is not the case for retail investors under most conditions.

Definitions

  • Best execution refers to broker-dealer’s obligation to seek the most favorable terms reasonably available for the execution of your orders. For large-scale, automated order routing, this obligation includes the duty to regularly and rigorously evaluate the quality of executions provided for orders in aggregate by each venue and to adjust routing as appropriate. Schwab considers a number of important factors in evaluating execution quality, including execution price and opportunities for price improvement, market depth and order size, the trading characteristics of the security, speed and accuracy of executions, the availability of efficient reliable order handing systems, liquidity and automatic execution guarantees, and service levels and the cost of executing orders at a particular market or firm.
  • Liquidity providers are broker-dealers who execute orders based on their assessment of how to obtain the best executions. They may act as market makers and execute orders against their own account or route orders directly to other execution venues such as Alternate Trading Systems or securities exchanges.
  • Market hours are when regular market session trading occurs, which is from 9:30 a.m. to 4:00 p.m. Eastern Time.
  • A market maker commits its own capital and stands prepared to buy and sell securities during the trading day at quoted prices.
  • National Best Bid and Offer (NBBO) represents the highest displayed bid price and lowest displayed offer price available for a security across the various exchanges or liquidity providers. Exchanges, ATSs, and liquidity providers are generally required by the Order Protection Rule (SEC Reg NMS Rule 611) to execute orders at the best displayed price or better.
  • A non-directed order is an order that does not include instructions to execute on a specific exchange.
  • A securities exchange is an entity that has registered with the SEC under the Securities Exchange Act of 1934 and facilitates the buying and selling of securities among market participants.
  1. Schwab may act as principal in limited situations such as covering firm trade errors, worthless (or near worthless) security transactions, or when liquidating equity positions of less than one share.
  2. Order routing information is for illustrative purposes only and does not necessarily represent every routing scenario or decision.
  3. Block size order as defined by SEC Regulation NMS.
  4. Non-marketable limit orders that become marketable during the routing process may be re-routed to one of our liquidity providers.
  5. See SEC Regulation NMS Rule 604 for more information.

Information about third-party ratings

CREDIT NOTICE. From Investor's Business Daily, January 30, 2017, ©2017 Investor's Business Daily Inc. All rights reserved. Used by permission and protected by the Copyright Laws of the United States. The printing, copying, redistribution, or retransmission of this Content without express written permission is prohibited. Results based on an Investor's Business Daily ("IBD") and TechnoMetrica survey of 4,752 visitors to the IBD website between August and December 2016. Those individuals were asked to name and rate their primary online broker. Limiting data analysis to only those firms that were cited by 125 or more participants, six online brokers were ranked based on Customer Experience Index scores for thirteen separate attributes. For further information on how the ratings were calculated, see IBD's Criteria and Methodology.

StockBrokers.com: “2017 Online Broker Review,” published February 21, 2017. Participation in the review is voluntary; a total of 16 online brokers submitted themselves for ranking for the 2017 review. The Online Broker Review assesses participating online brokers on 308 variables across 10 categories: Commissions & Fees, Offering of Investments, Platforms & Tools, Research, Customer Service, Mobile Trading, Ease-of-Use, Education, Order Execution, and Banking. All categories, with the exception of “Banking,” are factored in to the overall ranking. Star ratings are out of five possible stars and are based on a calculation that combines the variable assessment with an opinion score from 1-10 with 10 “very good” in StockBrokers.com’s opinion. Best in Class are online brokers who have placed within the Top 5 for a category. Industry Awards are awarded based on the opinions of StockBrokers.com. Read our 2017 Online Broker Review. For further information on how the ratings were calculated, see StockBrokers.com’s “How We Test”.

System availability and response times are subject to market conditions and mobile connection limitations.