How does Vanguard make money facilitating the purchase of Treasuries?

[PanJack]

I'm starting to buy Treasuries through Vanguard. How does Vanguard make money providing the service of facilitating the purchase by its customers of Treasuries?

[sycamore]

They don't appear to directly gain revenue or earn any profit from letting individual investors trade a Treasury for $0 at auction or on the secondary market.

(Source: https://investor.vanguard.com/client-be ... ommissions)

Maybe they avoid losing money that would happen if they were to charge a fee their competitors don't, causing enough wealthier clients to leave Vanguard?

I really don't know; I'm just guessing.

[yankees60]

They don't appear to directly gain revenue or earn any profit from letting individual investors trade a Treasury for $0 at auction or on the secondary market.

(Source: https://investor.vanguard.com/client-be ... ommissions)

Maybe they avoid losing money that would happen if they were to charge a fee their competitors don't, causing enough wealthier clients to leave Vanguard?

I really don't know; I'm just guessing.

Possibly their and other investment companies' version of "A Loss Leader"?

[retired@50]

I really don't know; I'm just guessing.

Same here, just guessing.

They don't make money transferring money to my checking account either, but they do it. Maybe it's considered part of the "cost of doing business" with investors. I don't imagine the US Treasury is charging anything to be part of an auction. The government is probably glad to find lenders wherever they may be located.

Regards,

[beyou]

Treasury and other bonds are almost all OTC or over the counter instruments. OTC instruments are profitable to brokers because the price they charge you is higher than what they would pay to buy and hold themselves, generally speaking.

New issue US Treasuries are a special case because brokers know you can buy them a auction without markup (at Treasury Direct). But they also know when you receive coupons and maturity proceeds, they will have your cash which is profitable. Also as per the link provided above “When acting as a principal for a primary market issue, Vanguard Brokerage generally receives a fee concession from the issuer”. So it is possible the Treasury Dept compensates brokers for selling their new issue bonds in the primary market as principal. Also the link says “An agent, executing your order at cost plus a commission.”

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.

[PanJack]

Thank you all for your responses above.

I read the information at https://investor.vanguard.com/client-be ... ommissions.

We learn from this document that, for any given service, Vanguard might impose a fee, a commission, and/or a markup (or markdown). They might also get a fee concession.

For instance, we read:

Vanguard Brokerage Services may act as one of the following:
* An agent, executing your order at cost plus a commission.
*A principal, adding markups to purchase prices or subtracting markdowns from sale prices. When acting as a principal for a primary market issue, Vanguard Brokerage generally receives a fee concession from the issuer.

(red added)

(Aside: that "may" (in red) bugs me. Perhaps they wanted to write that "Vanguard WILL act as one of the following." The use of "may" implies they might act as something other than an agent or a principal. I don't know what they intended here.)

But what about the purchase of a new issue of Treasuries? (This is what I'm interested in.) The document clearly states that NO FEE fee is imposed. But this still leaves the possibility of a commission or a markup, both of which are paid by the customer. The document doesn't provide any guidance about which of these, if any, will be imposed when a new Treasury issue is bought.

But in the process of buying a Treasury, you encounter a link to an FAQ. This FAQ states, among other things, "We do NOT CHARGE A COMMISSION to buy or sell a Treasury security." (Caps added). So we now know that when you buy a new Treasury, you don't get charged a fee or a commission.

This implies, going back to the first document, that Vanguard does NOT act as an agent when buying or selling a Treasury security, as the agent role involves a commission. So Vanguard must act as a principal when it buys a new Treasury for its customers. (Unless they act as something other than as a principal, which is made possible by the use of "may" above).

So it appears to me that Vanguard might earn money in two ways when facilitating the purchase of a new Treasury: they possibly earn a markup (acting as a principal) and they generally get a fee concession.

But I'm not sure.

[retired@50]

...
So it appears to me that Vanguard might earn money in two ways when facilitating the purchase of a new Treasury: they possibly earn a markup (acting as a principal) and they generally get a fee concession.

But I'm not sure.

I think you're getting into the weeds for little to no gain, other than understanding how things might work in the back-room at Vanguard.

From where I stand, you can either buy your new issue Treasury products at Vanguard or at TreasuryDirect.gov. If you think (or know) that the interest rate you'll earn will be greater at Treasury Direct, then use them. I suspect the two purchase options will pay the same interest rate, so in that case, I'd rather use Vanguard since it's easier if you ever need to sell a Treasury product before maturity.

Regards,

[sycamore]

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.

Thanks for this info. (I tried to posted a reply earlier, but apparently it got lost. I'll retype a shorter version.)

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!

[beyou]

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.

Thanks for this info. (I tried to posted a reply earlier, but apparently it got lost. I'll retype a shorter version.)

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!

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.

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.

[nyclon]

Based on my trade confirms they charge me about 3bps per trade on treasuries in the secondary market. I have no data about the primary.

[PanJack]

I think you're getting into the weeds for little to no gain, other than understanding how things might work in the back-room at Vanguard.

I like weeds.

The confirmation for my purchase of a new issue of a Treasury indicates that: (1) Vanguard acted as an agent but (2) they didn't charge a fee or commission. Perhaps they do get a fee from the US Treasury.

[alex_686]

I think you're getting into the weeds for little to no gain, other than understanding how things might work in the back-room at Vanguard.

I like weeds.

The confirmation for my purchase of a new issue of a Treasury indicates that: (1) Vanguard acted as an agent but (2) they didn't charge a fee or commission. Perhaps they do get a fee from the US Treasury.

They don’t. I don’t know anyone who does in this day and age.

Its like the free coffee that car dealerships give out. Its darn cheap and you might buy something. That something may be settlement funds, both when buying, selling, and for coupons. They do earn money from that. Not much, but the Treasury Auction process is dirt cheap.

Maybe the Treasury Department eats to cost for offering a front end to the brokers. They do have a mandate to help the small retail investor save.

[beyou]

Maybe the Treasury Department eats to cost for offering a front end to the brokers. They do have a mandate to help the small retail investor save.

But they have a poorly funded mandate, given the poor service at Treasury Direct.
I would rather pay a commission if Vanguard charged it than do no commission trades at TD.
I am winding down all my holdings at TD and look forward to closing the account.
They are failing at their mandate by causing huge delays in access to people's funds, delays that nobody would tolerate from any broker or fund. The problem is well documented here and I twice had to get signature guarantees at my bank so that TD could take 20 weeks to process a request. Last time I ask them to do anything, now I just do redemptions of bonds as it makes economic sense, not buying there anymore.

[alex_686]

Maybe the Treasury Department eats to cost for offering a front end to the brokers. They do have a mandate to help the small retail investor save.

But they have a poorly funded mandate, given the poor service at Treasury Direct.
I would rather pay a commission if Vanguard charged it than do no commission trades at TD.
I am winding down all my holdings at TD and look forward to closing the account.
They are failing at their mandate by causing huge delays in access to people's funds, delays that nobody would tolerate from any broker or fund. The problem is well documented here and I twice had to get signature guarantees at my bank so that TD could take 20 weeks to process a request. Last time I ask them to do anything, now I just do redemptions of bonds as it makes economic sense, not buying there anymore.

I will mildly note that there is a massive difference between running a operation for a limited number of brokerage institutions which have dedicated IT staff versus a general public website.

[exodusNH]

But they have a poorly funded mandate, given the poor service at Treasury Direct.
I would rather pay a commission if Vanguard charged it than do no commission trades at TD.
I am winding down all my holdings at TD and look forward to closing the account.
They are failing at their mandate by causing huge delays in access to people's funds, delays that nobody would tolerate from any broker or fund. The problem is well documented here and I twice had to get signature guarantees at my bank so that TD could take 20 weeks to process a request. Last time I ask them to do anything, now I just do redemptions of bonds as it makes economic sense, not buying there anymore.

I will mildly note that there is a massive difference between running a operation for a limited number of brokerage institutions which have dedicated IT staff versus a general public website.

This is absolutely true. Aside from the wide range of competencies of the general public, you also have issues with malicious actors, general security and software updates for publicly accessible sites, and then the nightmare of supporting a wide variety of web browsers and the random extensions people install.

[beyou]

But they have a poorly funded mandate, given the poor service at Treasury Direct.
I would rather pay a commission if Vanguard charged it than do no commission trades at TD.
I am winding down all my holdings at TD and look forward to closing the account.
They are failing at their mandate by causing huge delays in access to people's funds, delays that nobody would tolerate from any broker or fund. The problem is well documented here and I twice had to get signature guarantees at my bank so that TD could take 20 weeks to process a request. Last time I ask them to do anything, now I just do redemptions of bonds as it makes economic sense, not buying there anymore.

I will mildly note that there is a massive difference between running a operation for a limited number of brokerage institutions which have dedicated IT staff versus a general public website.

I am not sure what you mean nor how it is relevant to my comment.
Brokerages have websites with security issues, and they have customer service and back office staff to handle processing of security transactions.

Treasury Direct has to provide the some of the same services for their retail customers, except for a limited number of products they sell (just their bonds/savings bonds). I would think it FAR easier to handle such a limited universe of security types and transaction types yet at TD, yet they couldn't handle the spike in volume and popularity of their bonds in recent years. TD and brokerages have the same mandate "to help the small retail investor save" as you put it. TD just isn't very helpful. And the idea that brokers and mutual funds have somehow unlimited resources is just wrong. Every fund and broker and bank I have worked at was always looking to cut ops and tech resources to the bone. Offshore, nearshore, layoffs. I believe the people in the industry simply work harder than do TD employees, and TD is not staffing even a bare bones sufficient staff to meet any reasonable service level. I never complain about the TD website, it does the job. But the people are just slow and unresponsive to simple needs.

My point was having a mandate and having the resources to fulfill a mandate are 2 different things.
People should be glad if your brokerages act in a reasonable timeframe and be happy to pay for such service.
The fact Vanguard may do some transactions for free is nice, and everyone complains about Vanguard.
TD does all their transactions for free and we get no service as a result, far worse than Vanguard.

[exodusNH]

I am not sure what you mean nor how it is relevant to my comment.
Brokerages have websites with security issues, and they have customer service and back office staff to handle processing of security transactions.

Brokerages will be connected by a private, secure connection, run by a dedicated staff of trained individuals. The interface will be well-defined with changes going through a change control process.

Public websites have to

- support customers from a tech-savvy 18 year-old to a technical neophyte not speaking English as their primary language.
- fend off malicious attacks since they're publicly accessible
- deal with a wide range of computers and devices, running a variety of different web browsers and plugins, all of which have their own idiosyncrasies
- as a public website, need to be especially careful with security patches
- as a public website with a connection to US government systems, have to have much more stringent policies in place so that they don't become a launching off point into internal systems

[beyou]

I am not sure what you mean nor how it is relevant to my comment.
Brokerages have websites with security issues, and they have customer service and back office staff to handle processing of security transactions.

Brokerages will be connected by a private, secure connection, run by a dedicated staff of trained individuals. The interface will be well-defined with changes going through a change control process.

Public websites have to

- support customers from a tech-savvy 18 year-old to a technical neophyte not speaking English as their primary language.
- fend off malicious attacks since they're publicly accessible
- deal with a wide range of computers and devices, running a variety of different web browsers and plugins, all of which have their own idiosyncrasies
- as a public website, need to be especially careful with security patches
- as a public website with a connection to US government systems, have to have much more stringent policies in place so that they don't become a launching off point into internal systems

This has NOTHING to do with my post, whatsoever.
I never complained about the TD website, nor Vanguard's, nor any bank or broker I use.

TD that we use to buy bonds is not a public website, you open an account and have 2FA just like any brokerage or bank.
They NEED to have the same protections in place for retail customers like any brokerage or bank, and AFAIK they do.
This was not my complaint about TD, it was raised by alex

[Meg77]

How does Vanguard make money providing the service of facilitating the purchase by its customers of Treasuries?

I worked for a major investment firm, and we didn't make any money whatsoever on treasury purchases nor other stock/ETF trades. Some full service brokerages still charge a flat commission for trades or even a small per share trade fee if you're calling and going through someone on the investment desk (this is usually for larger institutional level trades), but I don't know of anyone who charges for that when it's a consumer-driven DIY trade via the online platform.

So in short, it's a free service they offer in hopes of enticing you to pay for some other product or service later (like buying an actively managed fund or even revenue from settlement accounts/cash). Plus brokers do make a spread when they sell most other bonds, though I don't think that is generally the case with treasuries.

[Artsdoctor]

I think you're getting into the weeds for little to no gain, other than understanding how things might work in the back-room at Vanguard.

I like weeds.

The confirmation for my purchase of a new issue of a Treasury indicates that: (1) Vanguard acted as an agent but (2) they didn't charge a fee or commission. Perhaps they do get a fee from the US Treasury.

You pay no fees of any kind when you buy treasuries at auction. If you hold until maturity, no fees there either.

Vanguard and any brokerage firm is going to hope that you'll have a portfolio of more than just treasuries. They'll make money somehow. The more money you have, the more they'll make, even if it's on the money in the settlement account while waiting for the auction to settle. Schwab in particular is known for this: the settlement account pays very little so they'll make some money on making people use that. Vanguard and Fidelity do not this so egregiously but they will always be hoping that you'll bring more business in.

[yankees60]

I will mildly note that there is a massive difference between running a operation for a limited number of brokerage institutions which have dedicated IT staff versus a general public website.

I am not sure what you mean nor how it is relevant to my comment.
Brokerages have websites with security issues, and they have customer service and back office staff to handle processing of security transactions.

Treasury Direct has to provide the some of the same services for their retail customers, except for a limited number of products they sell (just their bonds/savings bonds). I would think it FAR easier to handle such a limited universe of security types and transaction types yet at TD, yet they couldn't handle the spike in volume and popularity of their bonds in recent years. TD and brokerages have the same mandate "to help the small retail investor save" as you put it. TD just isn't very helpful. And the idea that brokers and mutual funds have somehow unlimited resources is just wrong. Every fund and broker and bank I have worked at was always looking to cut ops and tech resources to the bone. Offshore, nearshore, layoffs. I believe the people in the industry simply work harder than do TD employees, and TD is not staffing even a bare bones sufficient staff to meet any reasonable service level. I never complain about the TD website, it does the job. But the people are just slow and unresponsive to simple needs.

My point was having a mandate and having the resources to fulfill a mandate are 2 different things.
People should be glad if your brokerages act in a reasonable timeframe and be happy to pay for such service.
The fact Vanguard may do some transactions for free is nice, and everyone complains about Vanguard.
TD does all their transactions for free and we get no service as a result, far worse than Vanguard.

THIS court finds your facts and arguments quite persuasive and, thus, rules in your favor!!

[yankees60]

How does Vanguard make money providing the service of facilitating the purchase by its customers of Treasuries?

I worked for a major investment firm, and we didn't make any money whatsoever on treasury purchases nor other stock/ETF trades. Some full service brokerages still charge a flat commission for trades or even a small per share trade fee if you're calling and going through someone on the investment desk (this is usually for larger institutional level trades), but I don't know of anyone who charges for that when it's a consumer-driven DIY trade via the online platform.

So in short, it's a free service they offer in hopes of enticing you to pay for some other product or service later (like buying an actively managed fund or even revenue from settlement accounts/cash). Plus brokers do make a spread when they sell most other bonds, though I don't think that is generally the case with treasuries.

"So in short, it's a free service they offer in hopes of enticing you to pay for some other product or service later"

Then, as I already stated above ... could be analogous to a "loss leader"?