Do bid-ask spreads on ETFs differ between platforms?

[mrodent]

This seems like something I should probably know. But I'm a bit gobsmacked by a purchase I just made.

I have recently acquired some pretty big funds due to an inheritance and some of this at least is being put into GIA accounts.

Over recent weeks, making reference above all to the Monevator broker comparison page (https://monevator.com/compare-uk-cheapest-online-brokers/), but also threads here, I have now opened 4 new GIA accounts: at Charles Schwab, InvestEngine, Trading212 and, just this morning, Hargreaves Lansdown. The Charles Schwab account was opened in the mistaken belief that I'd be able to buy ETFs with ISIN starting "US ...". As detailed in previous threads I've now realised how naive that was! I intend to close this.

The InvestEngine and Trading212 a/cs were opened because these appear to be free purchase platforms: no annual charge, no transaction charge, amazing. I've googled a bit to find how they actually make money, whether they're "scams", etc. I have some doubts still about both: InvestEngine reportedly sometimes take a very long time to actually "settle" transactions. Trading212 apparently stopped accepting new accounts for about a year not so long ago, and their central "hub" or whatever is based in Bulgaria of all places. OTOH both the UK trading entities are obviously regulated by the FCA. But as at this writing, some doubts certainly linger.

Anyway, this morning, having learnt some time ago that Hargreaves Lansdown GIAs now don't have an annual charge if you avoid funds (OIECs I mean), but stick to ETFs and/or shares, I opened a GIA there and bought £60k of a global index tracker. Transaction charge £11.95, which is fine, given this is a long-term thing. The advantage of HL being that I have no doubts at all about HL's legitimacy.

However I then saw that the purchase had immediately "lost" something like £100 in value! It turns out that this is due to the bid-ask spread practised at HL. So I then went to Trading212 and initiated first a SELL and then a PURCHASE for a given ETF I hold. They don't appear to practise ANY bid-ask spread.

Is this common knowledge? Have I got something wrong about the Trading212 spread practice? I'm very surprised this is not detailed in the above Monevator platform comparison page: surely this is a very relevant aspect of comparison.

Before today I think I had assumed that all platforms would practise pretty much the same spread.

[mrodent]

(... can't now edit the above post)

It just occurred to me: maybe a bid-ask spread is not necessarily a bad thing? Is it possible that Trading212 works by taking a/the bid price on the market and a/the offer price on the market, and offering to buy and sell at the mid-point between those two prices? If so, that wouldn't necessarily make things particularly advantageous for investors.

Would be interested to know what learned posters have to say about this question.

[londoninvestor]

So I then went to Trading212 and initiated first a SELL and then a PURCHASE for a given ETF I hold. They don't appear to practise ANY bid-ask spread.

Do you mean that you actually executed a sell and a buy at Trading212, and achieved the same price for them? Or just that Trading212 quoted the same price for a proposed sell and a proposed buy?

T212 say that when showing market prices, they use Last Traded Price, and not a bid/ask spread: https://community.trading212.com/t/bid- ... tion/61714. If so, that's different from actually being able to buy and sell at the same price.

[ukmtk]

A buy/sell difference is fairly normal on shares/ETFs/ITs. It's how people make money.
The difference is typically smaller the more popular the item being purchased.
That's what can bite sometimes.
I once purchased £10000 worth of National Grid when I only meant to buy £1000.
Thankfully I only lost £100 reselling the £9000 back.

[londoninvestor]

Is it possible that Trading212 works by taking a/the bid price on the market and a/the offer price on the market, and offering to buy and sell at the mid-point between those two prices? If so, that wouldn't necessarily make things particularly advantageous for investors.

As I say, it's not necessarily clear that there is no spread on T212. But what you're getting at here is a genuine difference in the way that T212 works compared to HL (and other mainstream platforms).

HL is always acting as agent when you trade shares (https://www.hl.co.uk/__data/assets/pdf_ ... and-Cs.pdf, paragraph A14). HL doesn't buy/sell shares from/to you: it facilitates the transaction between you and a market maker, and charges commission for its facilitation service. The trade price (excluding commission) is whatever price the market maker is prepared to buy/sell at. (HL is also the nominee which holds the shares on your behalf, but that's a matter of legal ownership, not economic/beneficial ownership.)

T212 however "typically acts as principal in respect of Client Orders" (https://www.trading212.com/legal-docume ... icy_EN.pdf, section 6) - i.e. it can directly buy shares from you or sell shares to you, in which case the price is set by T212, not a market maker.

[Newroad]

Hi UKMTK.

I've always found the bid-ask spreads on major ETF's fairly tight (slightly more so than, say, major Investment Trusts).

At time of writing, as an example, I was being shown for VWRL

II: £98.81 - £98.86
IBKR: £98.84 - £98.87

It doesn't surprise me that IBKR appear tighter. The II one is likely to be an amalgam of available market data whereas the IBKR one is likely to be based on actual trades. I would expect you to be able to trade slightly inside the II quote.

Regards, Newroad

[gryffron]

Before today I think I had assumed that all platforms would practise pretty much the same spread.

They do. Generally speaking, ALL the online trading platforms take quotes from all the same online market makers. So the actual trade price you will achieve are rarely different for the different platforms. Despite boasts that they can "beat the spread", in practice, no-one has ever successfully demonstrated that any online platform is "better" than any other in this respect.

UNLESS you are trading large volumes of obscure low volume shares. In which case a full service broker may well be able to improve the price you pay significantly by ringing around known clients/dealers to try and match the trades for you. But full service brokers are VERY expensive compared to their online cousins. Typically 2% of trade value (no upper limit). A bit more than your £11.99. Probably not what you're looking for.

As regards "free" brokers:
Free/unrealistically cheap online brokers typically make their money by building up a large client base then selling out the whole caboodle to more expensive dealers. Leaving you then stuck with paying much higher fees or all the hassle of transferring your accounts. This has happened dozens of times in the past. They may also loan out your shares to margin traders (the Ts&Cs permit this), and whilst this hasn't bankrupted any of them yet, in extreme market situations it could.

Any reason you have ignored iWeb/Halifax/Lloyds (all the same platform) who are realistically cheap and have been around for decades?

Gryff

[mrodent]

Do you mean that you actually executed a sell and a buy at Trading212, and achieved the same price for them? Or just that Trading212 quoted the same price for a proposed sell and a proposed buy?

I didn't ... I got as far as the screen showing the price which (apparently) would be applied. So ... currently a mystery until someone clarifies.

[mrodent]

Free/unrealistically cheap online brokers typically make their money by building up a large client base then selling out the whole caboodle to more expensive dealers.

Right. How ridiculous.

Any reason you have ignored iWeb/Halifax/Lloyds (all the same platform) who are realistically cheap and have been around for decades?

Yes, a specific one. Lloyds is my main platform. I have 00s of 000s there, mainly funds, and mainly in my ISA.

So for the sake of spreading risk if for no other reason I just thought it might be good to concentrate my GIA in one (ideally) other broker. But to no-one's surprise, nothing's straightforward.

[mrodent]

Ah, in fact ...

I just bought some more in my HL GIA account - Vanguard FTSE All-World ETF (VWRL). This time there was no sudden drop when I bought.

And in fact the reason is probably that VWRL is denominated in GBP, whereas the All-World Invesco tracker I bought yesterday, FTWG, is, when you look closely, seemingly held in USD. So the discrepancy of yesterday may well be due to exchange costs/differentials rather than bid-offer spreads.

Swings and roundabouts init, because VWRL also has those peskily higher Vanguard charges (0.22% ... annoying).

[londoninvestor]

Ah, in fact ...

I just bought some more in my HL GIA account - Vanguard FTSE All-World ETF (VWRL). This time there was no sudden drop when I bought.

And in fact the reason is probably that VWRL is denominated in GBP, whereas the All-World Invesco tracker I bought yesterday, FTWG, is, when you look closely, seemingly held in USD. So the discrepancy of yesterday may well be due to exchange costs/differentials rather than bid-offer spreads.

Swings and roundabouts init, because VWRL also has those peskily higher Vanguard charges (0.22% ... annoying).

That Invesco fund can be traded in both currencies: FTWG is the ticker used when quoting and trading in GBP, whereas the dollar ticker is FTWD. See https://www.invesco.com/uk/en/financial ... &-Security.

You can see from the LSE website that the bid and offer for FTWG are quoted in pence: https://www.londonstockexchange.com/sto ... mpany-page.

Now, it may well be that FX costs indirectly contribute to the relatively large bid/offer spread when trading in GBP. (For example, it might be that authorised participants have to pay in USD, not GBP, if they want Invesco to issue new shares of the ETF - but I'm guessing here.) However, the spread you see on HL for FTWG represents the spread in the GBP prices quoted by the market makers, not some FX charge which is added by HL.

[GeoffF100]

HL is the only reasonable broker in your list, unless you want to trade US stocks. Realistically, you will not diversify risk by putting half your money with a safe broker like iWeb and half with, I hesitate to say a dodgy one, but a questionable one.

If it was VWRL that you bought, a price drop of 1% was likely mostly a price drop rather than the spread. Before you trade with a normal broker, you are quoted a spread. If the quoted spread is 1%, the market is wonky. Go away and try later. You should not trade blind. Look at the numbers before you trade. When you trade on the LSE, you should be able to find your trade on the LSE website. Compare it with other trades around that time. You should be able to guess which trades were purchases from a market maker and which were sales.

Other people have conducted tests where they fire off simultaneous trades with two brokers. They have found that the big online UK based brokers all offer the same price.