Schwab's Order Routing Process

Proactively working to provide you high quality executions is a responsibility we take seriously and it’s why we offer Schwab Order Execution Advantage™, our regular and rigorous monitoring of order execution quality among competing market venues, and looking for opportunities to adjust our 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 held 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).

How Your Orders Are Routed and Filled

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, best execution 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.

Special Handling for Not Held Orders:

For orders that meet certain criteria6 (i.e. oversized orders) and may require special handling, a customer may request to designate an order as not held. Schwab’s agency equity trading desks have the expertise and ability to source liquidity for these orders through third-party broker-dealers employing sophisticated order management tools. This may include algorithmic trading strategies or access to non-displayed liquidity that helps seek best execution for these types of orders while attempting to minimize market impact.

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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 and reliable order handing systems, liquidity and automatic execution guarantees, the likelihood of execution when limit orders become marketable, and service levels and the cost of executing orders at a particular market or firm.

A held order is an order that is intended to be represented in the market or executed as soon as practicable without discretion. Schwab reserves the right to review an order prior to routing for display/execution.

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 not held order is an order granting a broker-dealer with time and price discretion to transact on a best-efforts basis in an attempt to achieve best execution. Not held orders can be used as part of a more sophisticated order strategy that is intended to minimize market impact on less liquid securities or large orders.

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.

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