Charles Schwab, U.K., Limited

Charles Schwab, U.K., Limited
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Best Execution


Charles Schwab, U.K., Limited (“CSUK”) is committed to providing its client with Best Execution as detailed within the Best Execution section (11.2) of the Conduct of Business sourcebook ("COBS") of Financial Conduct Authority (“FCA”) Handbook.

CSUK BEST EXECUTION POSITION

When executing orders on clients' behalf, CSUK takes all reasonable steps to obtain the best possible result, taking into account various execution factors mentioned below.

Execution factors

When executing an order we take into account key execution factors, which are the characteristics of the:

  • Client;
  • Client order;
  • Financial instruments;
  • Execution venues to which the client's order can be directed; and,
  • Price and cost.
Price

Where CSUK transacts on behalf of a retail client the best possible result must be determined in terms of the price of the financial instrument, and the costs related to execution, including  execution venue fees, clearing and settlement fees and any fees paid to a third party involved in the execution of the order.

The position in respect of cost is that the client’s cost on any given execution is reflected in the commission charge.  CSUK publishes its full commission schedule to its customers and does not change based upon execution venue for an order - the customer will receive the same cost for their order regardless of where CSUK executes the trade.   However, it is understood by CSUK, the FCA and our execution venues that due to market execution factors it is not always possible to provide the best possible execution price with a reasonable amount of effort on every execution.  CSUK’s approach is to ensure as a whole Schwab is routing orders to venues that consistently provide the best possible result to our customers. 

Importance of differing execution factors

CSUK believes that the primary objective in delivering Best Execution is obtaining the best possible result for the client.  CSUK ascribes primary importance to a combination of instrument price and associated costs (i.e. total cost from the client's perspective) when executing orders for its clients. Speed, likelihood of execution and settlement, the size and nature of the order, market impact and other implicit transaction costs may be given precedence over the immediate price and cost consideration only insofar as they are instrumental in delivering the best possible result in terms of the total consideration to the retail client.

Execution venues

CSUK routes orders in securities (including equities, fixed income and listed options) to its U.S. affiliate, Charles Schwab & Co. Inc. (“Schwab”), which executes the orders through third party execution venues as described below.

Equities: Schwab routes equity orders to large wholesale market making broker-dealers which, because of their size and scale, are able to add liquidity and develop and maintain the most efficient and effective order routing for purposes of achieving best execution.   Schwab’s order management system and processes are designed to take all reasonable steps to obtain, when executing orders, the best possible result for all clients, taking into account the execution factors.  In directing its orders to these broker dealers Schwab provides greater liquidity, and more price improvement opportunities as a result of automatic execution and liquidity offered by the major wholesale market makers and their deep liquidity pools.  In this way, Schwab obtains higher levels of price improvement for clients through wholesale market makers than if Schwab routed directly to exchanges.  Schwab’s order routing also considers speed and likelihood of execution, where appropriate for a particular order, to achieve the best possible result.  

Exchange listed options: Schwab routes exchange-listed options orders directly to large wholesale market makers. Those trades are subsequently executed on the exchange on the market maker’s choice with a focus on execution quality for the orders. 

Fixed income: Schwab Bond Source (“SBS”) is Schwab’s proprietary fixed income order management system.  It centralizes orders placed by clients and internal representatives, and is used by Fixed Income Trading Desk   for order review, routing and execution.  SBS promotes price competition by connecting to eight sources of liquidity representing thousands of quotes from hundreds of different dealers.  This includes three major ATS/ECN platforms (KCG BondPoint, Tradeweb Direct, TMC Bonds), four direct dealer connections (Citigroup, Intl FC Stone, JP Morgan, Piper Jaffrey) and Schwab’s own proprietary markets.  The degree of liquidity provided from these sources varies across individual providers. Clients’ orders are placed versus matched with the best quote available at Schwab for their order criteria by displaying that price at order entry.  Upon order entry, the system will perform a second pricing check of the liquidity sources to determine whether any new/improved quotes have been posted.  It will then route the order for execution against the best quote available through these sources.

A list of the main execution venues is below.

All Order Monitoring

CSUK monitors the activity that Schwab undertakes in respect of how it regularly monitors the execution quality provided by the various execution venues so that orders in all financial instruments not directed to a specific exchange by clients are routed to venues that have provided high-quality executions over time.

Schwab monitors execution price and quality to ensure that trades are executing at or below the existing best bid/ask published independently of the execution venue.  Schwab ensures that any significant or consistent deviation from best execution is reviewed and addressed to ensure as a whole our client’s orders are receiving the best possible result.  Individual orders may be found to have received a price away from the market.  If the deviation is significant Schwab contacts the execution venue to receive price improvement on behalf of the customer.  If the deviation is small but the venue we are sending the order to consistently generate them Schwab will direct the order flow away from that execution venue.  Schwab maintains detailed reporting on our reviews of execution quality and our response.

Clients

It must be ascertained whether the client is either retail or professional.  There is a higher level of protection within Best Execution for retail clients specific to price and delivering best execution when there are competing execution venues.
 
Client Order/Financial Instrument

Because of the variations different constraints and limitations apply dependent upon the specific nature.  CSUK will take into consideration all of these factors with the key objective being obtaining the best possible result for its clients.

Client orders are received in all instances whether that be online through the account or by telephone. 

Specific Instructions

When following specific instructions from a client, CSUK will only apply best execution to the part of the order to which the client specific instruction does not relate.  It may be that the client specific instruction prevents CSUK from obtaining the best possible result for the client.  CSUK will inform clients of this risk.

Execution Venues

The variations in the costs of execution venues will be taken fully into consideration in respect of obtaining the best possible result for the client.
 
The principal venues to which Schwab routes equity orders are as follows:

  • UBS Securities LLC;
  • Citigroup;
  • Citadel Execution Services;
  • KCG;
  • G1X
  • Two Sigma;
  • Cannacord;
  • Cantor Fitzgerald;
  • NYSE;
  • BATS Exchange;
  • NASDAQ;
  • Archipelago; and,
  • AMEX.
The principal venues to which Schwab routes exchange-listed options orders are as follows:

  • Citadel;
  • Citigroup;
  • Susquehanna;
  • Wolverine; and,
  • Morgan Stanley.

Schwab routes fixed income orders to the following: 

  • KCG BondPoint;
  • Tradeweb Direct;
  • TMC Bonds;
  • Citigroup;
  • Intl FC Stone;
  • JP Morgan;
  • Piper Jaffrey; and,
  • Schwab’s own proprietary markets.