Seems agent would be the usual relationship for auction based new issue treasuries. No reason a retail broker like Vanguard would buy at auction, hold and then sell to a customer. OTOH, major investment banks like Morgan Stanely, Goldman, Citi, etc, could buy at auction and sell for a markup to customers, as principal. Vanguard and many retail brokers are not in the business of taking risk associated with large inventories. When you sell a Treasury, this is a secondary market trade, and Vanguard would have to buy from you at a lower price, mark it up to sell to someone else at a potential profit (or loss if market moves wrong direction). If Vanguard can find a matching buyer for your issue to be sold, they could act as agent and only make $ on commissions. Can go either way with highly liquid securities, but a broker for a less liquid security may not be able to find a matching buyer and act as agent, so they may act and principal to take more risk for more potential reward. Or they can act as agent and sell to another major bank/broker who will take the risk off Vanguard’s hands.Thanks for this info. (I tried to posted a reply earlier, but apparently it got lost. I'll retype a shorter version.)Look at your confirmations and it should say if your broker acted as Principal or Agent. This gives you an idea how they make money. Agents almost always charge a commission, principals rarely do since they are making a profit by marking up the price for their inventory, like any product you buy from a retail business that maintains inventory. Agents go and buy specifically for you when ordered, they do not keep inventory. So they charge commission for such service.
I looked at confirmations for a TIPS purchases on the secondary market at both Schwab and ETrade.
With Schwab the footnote is "D1 As principal for our account, we have sold to you or purchased from you."
With ETrade the footnote is "Morgan Stanley Smith Barney LLC acted as agent." However no commission or fee was charged. I guess they make up for the trade cost elsewhere?
The fee schedule for both brokerages says an online auction or secondary Treasury/TIPS trade is $0.
As a practical matter I'm satisfied I'm not getting ripped off.
Edited to add: sorry if discussing other brokerages is going off-topic. Thanks to beyou in any case!
They only are required to disclose the relationship on each trade, not their general decision making process for trades you might make in the future. The above options could be utilized over time both or just one of those processes.
Finally, for some securities, a broker like Vanguard can route your order to an electronic exchange to assure fast matching of buyers and sellers. Many use Tradeweb and build an interface to route your bond trade similar to how they route equity trades. In such case they can act as agent since they can find a matching trader for your issue and just charge a commission for arranging the match. This would apply only to secondary market trades.
In summary, retail brokers take less risk as agent, getting to charge you a known fee without ever owning the bond. For auction of new securities they may get that fee from the issuer (US Treasury in this case). This may be a scenario they can make $ with zero commission to you.
When they act as principal, they take a risk and MAY make a profit (or may lose but this is only if they hold a longer period and the market move wrong direction). But either way you wont know how much they make or lose.
Statistics: Posted by beyou — Mon Jan 06, 2025 12:05 pm