Understanding ECN Fees [VANGUARD CDN AGGREGATE BOND INDEX ETF(TSE:VAB)]

feesThe promise of commission-free ETFs has steered many index investors toward independent brokerages such as Questrade and Virtual Brokers. These deep discounters have a lot to offer, but before you sign on, make sure you understand the details of their pricing.

Orders at these brokerages may be subject to fees that originate with the exchanges and networks that match buyers and sellers. This includes the big boys such as the Toronto and New York Stock Exchanges, as well as a host of lesser-known electronic communication networks (ECNs) and alternative trading systems (ATSs). Though it’s not technically accurate, you’ll often hear all these costs lumped together as “ECN fees.”

ECN fees are applied on a per-share basis. They vary slightly depending on the brokerage and the specific exchange, but they’re always fractions of a cent. At Questrade, for example, the cost is $0.0035 on Canadian stocks and ETFs, while Virtual Brokers charges $0.0039.

It’s a very small cost—less than $2 on an order of 500 shares—but ECN fees are irritating because it’s hard to understand when and why they apply. So let’s dig a little deeper.

Staying liquid

ECN fees do not apply on every trade: they are only charged when a buy or sell order “removes liquidity.” What does that mean? An order that removes liquidity is one that is likely to be filled immediately. That includes all market orders, where the investor simply accepts the current price without specifying a minimum or maximum. It also includes

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