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by wing-_-nuts 501 days ago
TBH, I trust vanguard more, even if their website is absolutely worse. There's a saying, 'if you're not the customer, you're the product'. I expect trades on those index funds are getting 'front run' much like robinhood is getting front run. You might have a lower ER but your nav might effectively be higher when buying and lower when selling.

Of course, I'm a 'buy and hold' investor so this doesn't really effect me much, but it's the principle of the matter.
8 comments
bombcar 501 days ago
Fidelity uses those funds as marketing, and they make up for it with all the other services and funds they offer. It's intentional, and it's working.

Vanguard is more and more becoming a group that just wants to run ETFs and if you want to use them, they're making it harder and harder. They recently dumped all their 401(k) and similar plans from being in-house to some other provider.

Saves costs, makes support annoying.

Of course, you can use a Fidelity account to own Vanguard ETFs if you wanted.

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skeuomorphism 501 days ago
> Fidelity uses those funds as marketing, and they make up for it with all the other services and funds they offer. It's intentional, and it's working.

> Vanguard is more and more becoming a group that just wants to run ETFs and if you want to use them, they're making it harder and harder. They recently dumped all their 401(k) and similar plans from being in-house to some other provider.

If this is true, then it must for individuals.. My company moved a little over a year ago TO vanguard for 401ks

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sgerenser 501 days ago
It was only for solo 401ks and small business with less than $20M in assets.
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phil21 501 days ago
Thanks for the reminder to move some old IRA accounts they dumped onto some random provider to Fidelity.

Horrible move on their part, if I didn't want some provider diversification I'd just move everything over entirely at this point.

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matthewaveryusa 501 days ago
>Of course, you can use a Fidelity account to own Vanguard ETFs if you wanted.

Which I would highly recommend if you ever want to change brokers. the fidelity ZERO products are great but can only be held at fidelity while VOO shares can be transfered to any broker.

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robocat 500 days ago
I presume the main advantage of transferring shares is to avoid taxation on realised gains. Secondary is to avoid transaction fees?

I sold and bought recently (because transfer looked like paperwork hassle to me): had a small transaction cost, and the main disbenefit was losing transaction history e.g. buy date was now reset; it was tax neutral for me either way.

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wbl 501 days ago
Vanguard is still offering IRAs last I checked.
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phil21 501 days ago
It's not clear to me exactly what they have moved, but two of my (very old) Simple IRA accounts got forcefully moved without my approval, and a 401k rollover into a self-managed IRA is still around. Not sure what the difference was exactly.

https://www.ascensus.com/about-us/press-room/news/ascensus-t...

This post was a reminder to get those moved out of Ascensus into Fidelity if possible.

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jliptzin 501 days ago
There’s not really much money to be made front running someone’s deposit into an index fund that’s gonna sit there for the next 40 years. It works on RH because generally those users are transacting much more frequently and in much less liquid things like options.
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pembrook 501 days ago
Front running customer purchases is not the concern. In the running of an index fund there’s many levers you can pull to create revenue streams that don’t show up on expense ratios.

Funny business can absolutely be pulled during rebalancing.

Another big one is securities lending income. Vanguard pays that out to investors which effectively creates negative expense ratios in certain funds. Index funds from other issuers don’t necessarily share that securities lending income with customers.

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jliptzin 501 days ago
I’m not disputing other funny business, I just don’t think they are making money front running passive index investors.
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ilya_m 500 days ago
It's not about front-running investments _in_ passive index funds, it's about front-running investments _by_ passive index funds, which, of course, ultimately comes out of the investors' wallets.

As a practical matter, since dealing in mutual funds' shares is settled after market, "front running" these transactions would be problematic. (Impossible, I'd say?)

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ardit33 501 days ago
I trust Fidelity. I used to work there years ago. It is a conservatively run place, careful with changes, which is a good thing when managing large amount of money. The tech and web interface might not be the shiniest, but I'd rather have my money there than vanguard/schwab, etc...
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2OEH8eoCRo0 501 days ago
How do you front run a mutual fund? The price is the price.
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short_sells_poo 501 days ago
If you know the index rules, it's fairly simple to calculate the turnover it is going to generate when it rebalances and subsequently the impact the rebalance is going to have on prices. This is a fairly well known behavior and a lot of players have been doing this for a long time. Basically every index of any significance is already being monitored and rebalancing effects are "front-run" this way.

I put the word in quotes, because this is a perfectly legitimate way of front running. The major indices are all public, and anyone can take a crack at this. In other words, if I announce to the world a month in advance that on a specific day and a very specific time of the day (at the closing auction) I'm going to buy X amount of specific stocks and sell Y amount in other stocks, I can't blame people for using that information against me.

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loeg 501 days ago
This is not what "front running" means.
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short_sells_poo 501 days ago
Yeah duh. I was explaining to the parent.
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loeg 500 days ago
No, you're still saying it's front running.

> Basically every index of any significance is already being monitored and rebalancing effects are "front-run" this way.

> I put the word in quotes, because this is a perfectly legitimate way of front running.

No; it is not "front running."

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fsckboy 500 days ago
How do you front run a mutual fund?

as a "consumer" of the mutual fund, you can't.

but the mutual fund itself makes large trades: somebody downstream executing those trades or having access to that data could front run.

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manojlds 501 days ago
You mean an index fund?
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2OEH8eoCRo0 501 days ago
An index fund is a type of mutual fund
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lotsofpulp 501 days ago
Wouldn’t index ETFs be index funds that are not mutual funds?
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2OEH8eoCRo0 501 days ago
Yes and they trade during market hours the same as stocks so I understand front running those trades.
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manojlds 501 days ago
Yeah but you can front run a (active) mutual fund
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toast0 501 days ago
Predict or react to index changes faster than the funds that are compelled to follow the index.

But you can't front run shares of mutual funds; they always trade at close of business at NAV.

You could potentially front run ETFs, but if you're worried about that, you can use limit orders and get the price you want or not transact. As long as you use a competent broker that offers limit orders.

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kasey_junk 501 days ago
That’s not front running! Front running requires a fiduciary obligation to who you are trading on behalf of.
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toast0 501 days ago
Investopedia disagrees:

> A form of front-running in index funds is common and isn't illegal.

> Index funds track a financial index by mirroring the index's portfolio. The composition of the index changes periodically to balance it accurately as the stocks that make it up change dramatically in price or as stocks are added or removed from the index. That forces the fund's managers to buy or sell some components of the index.

https://www.investopedia.com/terms/f/frontrunning.asp

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kasey_junk 501 days ago
Then investopedia is wrong. Front running is a very specific thing, a) it requires private information, b) requires trading on behalf of someone and c) requires a fiduciary duty to the person
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gruez 501 days ago
If we use that expansive definition of "front running", is it "front running" if I buy stocks trying to squeeze short sellers? What about if I thought people would buy/sell telsa stocks because of musk's role in the culture wars, and tried to get ahead of that? Is "front running" just buying low and selling high?
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toast0 501 days ago
Well, let's not call a short squeeze by another name.

Otherwise, I wouldn't call those things front running, as there's no indication of imminent activity.

If a material increase in lending rates on a heavily shorted stock was announced, and you bought because you were pretty sure the shorts would be buying to close, that could be front running, yeah.

I dunno about market moves based on Elon's role in the culture wars, but maybe if he did something in particular.

In general, buy on the rumor, sell on the news could qualify as front running under this definition, but I think I'd want to narrow it a bit to working to trade ahead of perceived imminent and definite trades. Most of the illegal front running is trading ahead of specific trades in response to seeing those orders.

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kasey_junk 501 days ago
Front running is illegal.
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NickC25 501 days ago
In finance, nothing is illegal if the profits outweigh the fines.

Citaldel paid handsomely for order-flow information from Robinhood. They made a lot of money off retail traders. They paid a fine IIRC equivalent to a few day's profits.

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kasey_junk 501 days ago
PFOF is neither front running nor illegal.

If you are curious about a brokers position on PFOF you can look up their disclosures. SEC Rule 605, 606 and 615 are the search terms you want when looking these up. Fidelity has a similar disclosure on this as Vsnguard, which is that they don’t engage in PFOF except for some options markets.

Robinhood got in trouble for false advertising about PFOF not because they engaged in it, because again, PFOF is not front running and not illegal.

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benreesman 501 days ago
PFOF isn't (typically) illegal, a better word might be "controversial". There's nothing free in this life: the zero commission brokers are making it up somehow.

While the studies on how PFOF effects execution quality are varied, this summary [1] from Wharton seems fairly balanced. It's not as simple as citing NBBO and moving on.

Personally I'm suspicious of the practice mostly because of the pretty clear conflicts of interest that it creates. Again, this is controversial, but the people arguing it's ok are for the most part making money from it.

[1] https://wifpr.wharton.upenn.edu/uncategorized/research-spotl...

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loeg 501 days ago
The zero commission brokers typically make most of their revenue on net interest margin. PFOF is a smaller portion.
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Scoundreller 500 days ago
securities lending doesn’t hurt if your clientele likes heavy short-interest-worthy meme stocks
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xadhominemx 501 days ago
Robinhood makes the majority of their revenue on options and crypto. Vanilla equities is becoming less important.
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seabird 501 days ago
PFOF is not front running. Market making is not front running. Full stop. This fact is only controversial if you fundamentally misunderstand what market makers do.
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yellowstuff 501 days ago
There's a lot of confused comments on this thread. "Front running" in the strictest sense means illegal trading that involves taking advantage of trades that you know will happen and you have a responsibility not to exploit. "Front running" is also used informally to mean legally trading prior to trades that you anticipate happening. Studying the rules of an index and buy a stock just before its added to the index and index funds are required to buy it is "front running" in the second sense.
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SteveNuts 501 days ago
Isn't it just PFOF? Is that actually illegal?

Edit: No, it's not in the US at least. It mostly just allows the broker to internalize orders if they prefer.

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op00to 501 days ago
Only if you get caught. And the fine needs to be higher than the profit.
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xadhominemx 501 days ago
It’s pretty easy to learn how fidelity and others make money on fee-free index funds. Perhaps something to look into before accusing them of committing a crime.
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zelon88 501 days ago
Considering someone or some activity to be criminal, and accusing them of being a criminal, are two completely different things.

I consider most financial institutions to be criminal because it is always their clear intention to circumvent the spirit of the law as closely as possible. The intention is to reap the benefits of breaking the law, without the risk of consequence. When the pitchforks come, these are going to be the criminals being chased down the street.

By the same token, I do not consider a parent who writes a bad check for groceries to be a criminal.

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Dylan16807 501 days ago
The client generally saves money in the PFOF situation. They benefit, their broker benefits, and the market maker they deal with benefits. The only loser is the abstract rest of the market being able to get fewer penny shavings.

What in particular do you see as against the spirit of the law?

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xadhominemx 501 days ago
PFOF does not violate the spirit of the law
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edmundsauto 501 days ago
I think the fine needs to be higher than the profit difference between the (illegal) and not illegal option.

If you have a legal route to $1M and an illegal route to $1.5M, the rational calculation for fines is against the $0.5M delta, not the full amount.

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nothercastle 501 days ago
The illegal 1.5 is always the optimal game theory choice because the chance of getting caught is not 100%
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BobaFloutist 501 days ago
To use an absurd example just to make it incredibly obvious why what you said doesn't make sense, would that hold up if the fine if caught was $10 trillion dollars?
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nothercastle 501 days ago
Then shareholders would demand executives have skin in the game and suffer if a company got the death penalty like you describe. Would likely lead to a much better world. Golden parachutes would not be a thing if shareholders got liquidated like that.
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recursive 501 days ago
Only if they're mutually exclusive.
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NegativeLatency 501 days ago
The riskier the road, the greater the profit.
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Animats 501 days ago
I trusted Vanguard more until they became a broker and forced all their fund customers to have a brokerage account with them.
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fallingknife 501 days ago
The pennies that they scalp off you on the trade by "front running" the order is much less cost than the annual fee if you are a long term investor.
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losvedir 500 days ago
You expect wrong. I think you're talking about Payment for Order Flow (PFOF) which Fidelity does not use.[0]

[0] https://www.fidelity.com/trading/execution-quality/overview

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