SoFi Invest: The 411
Over the past couple of weeks, lots of questions have come up around retail investing platforms, including SoFi Invest®, and the business practices that keep them up and running. They’re good questions, and we want to give you the answers. It’s a lot to unpack in a single, digestible blog post, but we’re going to do our best to break it down, and will continue to keep educating and reassessing as the industry changes. Let’s get a few important things straight right off the bat:
1) We believe it can be a highly problematic precedent to pick and choose which stocks we allow or disallow retail investors access to. SoFi will not block access to trading individual stocks on its platform1. Partners such as clearinghouses and exchanges do have this discretion, which may affect the liquidity of stocks and thus the ability to buy or sell.
2) SoFi Invest does not sell trading data from its members (aka customers), in individual or in aggregate form, to anyone, for any use.
3) SoFi Invest routes member orders to deliver an execution that is either at or better than the equivalent price that would be executed by going directly to a major exchange.
4) SoFi generated $470k in what is referred to as “payment for order flow” in 2020 and delivered $511k in price improvement to its Invest members.
5) As of Jan 12, 2021, SoFi equity ownership in Apex was reduced from 17% to less than 1%.
6) Another source of revenue for SoFi Invest is share lending.
Now we’ll dive into each of these points a bit deeper…
We believe it can be a highly problematic precedent to pick and choose which stocks we allow or disallow retail investors access to. SoFi will not block access to trading individual stocks on its platform. Partners such as clearinghouses and exchanges do have this discretion.
SoFi Invest is designed to lower the barriers to entry for retail investors, while giving them the tools to make informed investing decisions that are best suited for them. We believe that it is highly problematic to pick and choose which stocks we allow or disallow retail investors access. It is our responsibility to build a durable product offering, set the right priorities, allocate the right resources in People, Technology, Capital, and Partners, ensure the appropriate Risk controls, impart accountability, and build the necessary culture to provide our service to you. If we come up short, we will provide the transparency that you deserve as a SoFi member and, importantly, outline the lessons learned so we can be better every time.
SoFi Invest does not sell trading data from its members, in individual or in aggregate form, to anyone, for any use.
SoFi Invest does not sell trading data to anyone for any use, including, but not limited to, using the trading data to understand the most widely held stocks, the amount of a stock sold or bought, the types of buyers or sellers of stocks (generally or specifically), or the prices of buys and sells (generally or specifically).
Many third parties, including hedge funds, have asked to buy anonymized, platform-level data about trading on SoFi Invest. We’ve evaluated these opportunities and decided not to pursue them. While these opportunities might have created revenue for us and increased our ability to invest the proceeds in better service to you, we decided the benefits were not worth the risks. If this were to change, we would provide the proper disclosure and advance warning.
SoFi Invest routes member stock orders to deliver an execution that is either at or better than the equivalent price that would be executed by going directly to a major exchange.
Let’s take a step back and look at all of the ways a trading platform can execute a member’s stock order. Here are four of the methods a brokerage could use:
1) Direct to an exchange such as New York Stock Exchange (NYSE), NASDAQ, or CBOE Global Markets (BATS)
2) Directly via a market maker or wholesaler
3) Through a clearing and custody partner that has execution agreements with multiple market makers and other venues
4) Or, internalization, where the platform executes transactions for their members out of their owned inventory
In the first method, going directly to the exchanges, in the case of a market order, the order is executed immediately with the available liquidity on the exchange. When a customer specifies the price and sends a “limit order,” similarly, the order is sent for execution. But if there is no matching order available for the member’s limit order on the exchange, the order remains unexecuted until the liquidity becomes available or the customer may have to constantly update the order till completed.
In the case where a broker goes via a market maker or wholesaler, trades are routed to a market maker. The market maker provides an execution from its inventory while pricing the execution to be at or between the National Best Bid and Offer (NBBO). The market maker may provide a price improvement or enhance liquidity meaning if lesser number of shares were available on the NBBO, the market maker may execute a larger order.
The fourth method, internalization, is when the broker provides execution by crossing offsetting customer orders or providing an execution from the broker’s own principal trading account. The internalizer is obligated to provide the fill at or better than the NBBO price to honor best execution obligations.
At SoFi, we have chosen route #3, working through a clearing and custody partner. At SoFi, we work with Apex Clearing who routes our orders, as well as the orders for tens of millions of accounts of their other broker partners, to more than eight wholesalers or market makers, not one or two.
Why would a trading platform choose to go through a clearing and custody partner to route orders to market makers? Four reasons.
First, when a buy order is executed directly on an exchange, that order is filled at the price the sellers are asking or in industry parlance the “Ask.” When a trading platform executes a buy order via a wholesale market maker, in our case via Apex’s several wholesaler relationships, that order often occurs at or below the asking price. These wholesalers generally reduce the spread that the customer pays.
Second, an exchange order also has a typical standard fee of $0.003 per share, meaning the price and cost of a trade routed to a wholesaler is also more cost efficient. So, if a broker tells you they are executing your order via direct routing to an exchange, realize that unless they have invested significantly in building high-frequency trading infrastructure, you may get a worse price on average and a potential additional cost on your market orders to the trading platform than if that broker routed your order to a wholesale market maker. Wholesale market makers have invested tens of millions of dollars in building infrastructure and committed capital to compete on the basis of providing relatively better executions on your trades than possible on the exchanges. The wholesalers also realize trading efficiencies from their large order flow to provide meaningfully better execution.
Third, wholesale order routing, as compared to exchange order routing, not only allows the trading platform to seek better price execution and lower costs for our members, but it also works to handle problems better. For example, if there is a busted or failed trade with an exchange, there is no resolution in line with the desired order. For a wholesale market maker, a busted or failed trade is generally resolved consistent with the intended order, meaning for the member, the problem is often automatically resolved without interruption!
And lastly, any orders routed to the wholesaler market maker by the executing partner, (in our case, Apex), are combined with hundreds of thousands of other trades with no attribution or ability to identify what broker those trades are coming from. That means all trades in that batch are treated the same, with no preference or special treatment and no signal from platform-specific orders on what may or may not be trending.
We have chosen to execute in this way because based on our research conducted in partnership with Apex, we believe this results in a better price (by better we mean lower price on a market buy order, or higher price on a market sell order) to the member than if we executed the orders directly through the exchange or via one or two market makers.
Price Improvement and Payment for Order Flow
For those not familiar, “payment for order flow,” shortened to “PFOF,” is a component of the process for trades that are executed via wholesaler. As mentioned earlier, wholesale market makers work to to execute trades below the ask for a market buy order or above the bid for market sell order. When a wholesale market maker is able to execute a trade below the ask for a buy or above the bid for a sell, they have achieved price improvement. The price improvement is then reflected directly in the share price to the investor.
To dive in a bit deeper with a specific example based on SoFi, in Q4 2020, the total price improvement achieved and available to SoFi and our members was $432,000 across millions of trades. Of that savings, $274,000 was allocated to better prices to the SoFi Invest member on the trade and $158,000 was allocated to SoFi as payment for order flow across those millions of trades. There was an additional price improvement savings that was provided to Apex (less than $50k in the same time period) for its role in routing orders, clearing, and custody. In all of 2020, SoFi generated approximately $470,000 in PFOF to SoFi. Importantly, we have always been transparent about payment for order flow and disclosed it on our website and app from day one of SoFi Invest active investing. We will continue to drive efficiencies and economy of scale to improve the level of savings we provide for our members.
SoFi’s position in Apex Clearing Corporation
People have asked about SoFi’s equity stake in Apex out of concern that we benefit indirectly from other forms of compensation or payments in the ecosystem. As of Jan 12, 2021, SoFi equity ownership in Apex was reduced from 17% to less than 1% and SoFi does not maintain any board or management role in Apex Clearing Corporation.
Another source of revenue for SoFi Invest is share lending.
First, to break down how share lending works. We’ll use SoFi as the example. The shares of our members are housed at a custodian, Apex. Apex receives requests to borrow a particular security at a stated interest rate. Apex pools shares of that security from enrolled client accounts, makes the loan to the counterparty, and manages the loan along with any returns or recalls that may occur.
And now, the facts about the practice of share lending. Share lending is an industry-standard and regulated practice, allowing trading platforms to generate revenue to offset some of the costs of running the business.
One could argue whether share lending is good or bad for the market, retail investors, or institutional investors. In SoFi’s view, based on ongoing industry research2, the more liquidity in markets, the better functioning they are, and the more efficient they are. We can’t predict who will go long or short a stock, and it’s not our goal to have a point of view. Instead, we support orderly and liquid markets and as such, we have chosen to support share lending as it helps make a market more efficient, while providing more access for investors in whatever view they want to express in an investment.
Active Invest members can request to opt out of share lending by reaching out to customer support, and we’re working on an easier self-serve option to come down the road.
The industry is not simple. It’s complex, and rapidly evolving. It is our responsibility as a trading platform to hold ourselves to a rigorous standard of validation, ongoing analysis, and exploration about the practices we choose to employ.
But, in order to continue to offer commission-free trading, we have to have a durable business and company. At times, those two objectives can come at odds with each other. When they do, we will endeavor to do the harder right over the easier wrong (in line with one of our core values – “Do the right thing. If you’re not sure, do the harder thing.”).
We believe in a capital markets system that best meets the needs of our members, the retail investors. With that comes transparency, integrity, and regulatory compliance.
1Stocks on SoFi Invest must maintain the following criteria to continue to be offered on the platform:
1)Trade on a major exchange, including NYSE American, CBOE BZY/CBOE BYX, Nasdaq, NYSE with a market capitalization greater than $10m;
2)Trade over-the-counter with a market capitalization greater than $25m or average 30-day volume greater than $500k;
3)Registered with SEC as an investment company, including exchange-traded products and closed-end companies
2See for example https://www.brookings.edu/wp-content/uploads/2016/07/market-liquidity.pdf
The information provided is not meant to provide investment or financial advice. Investment decisions should be based on an individual’s specific financial needs, goals and risk profile. SoFi can’t guarantee future financial performance. Advisory services offered through SoFi Wealth, LLC. SoFi Securities, LLC, member FINRA / SIPC .