Order Handling

Overview

• DriveWealth sends all customer orders received to an executing broker for execution. The executing brokers used by DriveWealth are disclosed on the firm’s 606 report

• DriveWealth and its executing brokers take into account several factors in determining how customer orders execute and where to send customers’ orders, including, but not limited to:

  • size and type of the order
  • terms and/or conditions of the order
  • nature of the market for the security (demand)
  • trading characteristics of the security
  • transaction costs
  • the speed executions are obtained
  • the opportunity for price or size improvement

• DriveWealth regularly reviews transactions for quality of execution

Market Orders (Stocks)

• DriveWealth has implemented various controls that are designed to ensure that clients’ market orders for U.S. listed stocks are not executed on exchange at prices that are worse than the market price at the time DriveWealth received the order (i.e. NBBO or, if unavailable, the consolidated last sale price for the security), by more than certain percentage amounts. These controls generally relate to the market price of securities offered by DriveWealth and range from 3% for stocks with a market price of $50 or higher, to 10% for stocks that are $3 or lower

• DriveWealth will cancel any order or portion of an order that would execute at a price worse than the applicable percentage, with the exception for Market on Open orders, Market on Close orders, and market orders received during a trading pause or halt.

Market Orders Disclosure

(Notional/Fractional Share Trading)

• To facilitate notional based trading DriveWealth may process orders as agent, or through its principal facilitation account, or both (e.g. mixed capacity). Executing notional based orders often requires a mixed capacity trade - if an order requires all or a portion of the order to be filled from DriveWealth’s principal facilitation account, DW obtains the NBBO price from the market at the time the order is received and applies that price to the order in its entirety, giving the customer at least the best market price, or better[m1] (if price/size improvements are achievable).

Pre-market Resting Orders

(Market orders placed prior to the Open)

• Orders placed before the market open, will be sent to the street prior to the market session. Generally, orders placed before 9:28am will be executed in the opening auction, though, depending on the specific symbol characteristics, size, liquidity and other factors, may not be achievable and the opening auction price is not guaranteed. Pre-market orders that represent less than 1 whole share of any symbol, will begin executing on the market open at 9:30am and similarly the price and time in which these are executed are largely governed by the market characteristics of the security traded.

Conditional Guarantee Orders

• A conditional guarantee order is a type of limit order that is guaranteed execution at an agreed upon price or better. Conditional guarantee orders are treated as “not held” and once quotations in the marketplace are equal to or better than the guaranteed price, DriveWealth may execute all or a portion of the order as agent, risk-less principal or principal. Depending on the terms of the conditional order, customers will receive the execution price or an average price of all executions, which may be better than the guaranteed price, but not worse.

Stop Order Disclosure

• A "stop order" is an order to buy (or sell) that becomes a market order to buy (or sell) when a transaction occurs at or above (below) the stop price. A "stop limit order" is an order to buy (or sell) that becomes a limit order to buy (or sell) at the limit price when a transaction occurs at or above (below) the stop price. When the stop price is triggered, DriveWealth, LLC is required to execute fully and promptly at the current market price. Therefore, the price at which a stop order is ultimately executed may be significantly different from your specified stop price.

Stop Orders During Volatile Market Conditions

• Please note that while you may receive a prompt execution of a stop order that becomes a market order during volatile market conditions, the execution may be at a significantly different price from the stop price if the market is moving rapidly. Further note, the price of a stock can move significantly in a short period of time during volatile market conditions and trigger an execution of a stop order (and the stock may later resume trading at its prior price level). If your stop order is triggered under these conditions, you may receive an undesirable price even though the price of the stock may stabilize or return to previous levels, during the same trading day. Additionally, the activation of sell stop orders may add downward price pressure on a security. If triggered during a precipitous price decline, a sell stop order is also more likely to result in an execution materially below the stop price.

Buy Stop Order

• Can be used to establish a new long position. A Buy Stop Order is placed above the current market price, and once the stop price is reached, the order becomes a market order and is executed at the next best price.

Example:

• A customer may think that if shares of XYZ trade above the 52-week high of $32, they are likely to continue moving higher, but while the price is just below that level, the customer does not wish to buy. The customer could leave a stop buy order at $32.75, which if triggered means the 52-week high has been broken, and the customer would have entered a long position in anticipation of higher prices.

Sell Stop Order

• Is placed below the current price to limit losses or to protect gains on an existing long position. A Sell Stop Order is placed below the current market price, and once the stop price is reached, the order becomes a market order and is executed at the next best price.

Examples:

• A customer is long 100 shares of XYZ at $32; the stock is now trading at $29 and the customer is concerned it will fall further. The customer can place a Sell Stop Order at $27 to prevent additional losses. If the price trades at or below $27, the stop sell order will be triggered and the long position will be closed.

• A customer is long 100 shares of XYZ at $32 and the stock is now trading at $41. The customer would like to maintain the long position but is concerned the stock will reverse and begin to fall in price, eroding some of the unrealized profit. In order to protect the unrealized profits, the customer could place a Sell Stop Order at $40. If the stock price does start to decline and reach the stop price, the order becomes a market order to sell 100 XYZ and the long position is closed.

Important items to note about Stop Orders:

• When Stop Orders are placed, a check is done to ensure the client has the shares to sell. If the Stop Order is greater than the quantity of shares available for sale, then the Stop Order will be rejected/cancelled. Additionally, when a Stop Order is triggered and released, an additional check is done, and if the Stop Order quantity is greater than the quantity of shares available for sale, it will be rejected/cancelled.
• Once a Stop Order is submitted and accepted, it is the customer's responsibility to maintain and update the Sell Stop Order to reflect any changes in the underlying position. For example, if a client owns 20 shares of X, and places a Sell Stop Order for 20 shares, but later sells 10 of the shares, the customer is responsible to amend the quantity of the Stop Order from 20 to 10. Failure to do so may result in the open stop order being cancelled and the shares not being sold.
• Stop orders cannot be placed within $0.05 of the current NBBO. Buy Stop orders must be at least $0.05 greater than the current NBBO offer or the order will be rejected; Sell Stop orders must be at least $0.05 less than the current NBBO bid or the order will be rejected.

Security Halts

• DriveWealth processes security halts differently for fractional and whole share orders.

• Whole Share orders that are submitted during a security halt are left in a PENDING state, and will be processed once the halt has been lifted.

• Fractional Share orders, e.g. 0.555555 shares, that are submitted during a security halt are immediately REJECTED

• When a security halt does occur, Partners are provided an [instrument updated] event that would be structured as the following:

• {
  "id": "event_17913550-6db0-4086-9137-3fd728bd6821",
  "type": "instruments.updated",
  "timestamp": "2019-08-21T16:41:53.938331938Z",
  "payload": {
  "instrumentID": "26fa9515-d1c6-44ce-93b2-b94430451508",
  "previous": {
  "status": "ACTIVE"
  },
  "current": {
  "status": "HALTED"
  }
  }
  }

Trading Protections

• DW performs certain risk checks on the transaction before accepting it for execution:
  • Fat finger: 10,000 share maximum per order. This can be overridden for a specific account if required.
  • Preliminary Buying Power checks on the customer to ensure sufficient buying power to cover the trade; this does not apply to Partners who link to an external cash balance
  • Preliminary Short Sell check on sell side trades to ensure the customer is not selling into a short position/debit

DW Security types

Equity

A stock (also known as equity) is a security that represents the ownership of a fraction of a corporation. This entitles the owner of the stock to a proportion of the corporation's assets and profits equal to how much stock they own. Units of stock are called "shares."

Corporations issue (sell) stock to raise funds to operate their businesses. The holder of stock (a shareholder) has now bought a piece of the corporation and, depending on the type of shares held, may have a claim to a part of its assets and earnings. In other words, a shareholder is now an owner of the issuing company. Ownership is determined by the number of shares a person owns relative to the number of outstanding shares. For example, if a company has 1,000 shares of stock outstanding and one person owns 100 shares, that person would own and have claim to 10% of the company's assets and earnings.

Stock holders do not own corporations; they own shares issued by corporations. But corporations are a special type of organization because the law treats them as legal persons. In other words, corporations file taxes, can borrow, can own property, can be sued, etc. The idea that a corporation is a “person” means that the corporation owns its own assets. A corporate office full of chairs and tables belongs to the corporation, and not to the shareholders.

This distinction is important because corporate property is legally separated from the property of shareholders, which limits the liability of both the corporation and the shareholder. If the corporation goes bankrupt, a judge may order all of its assets sold – but your personal assets are not at risk. The court cannot even force you to sell your shares, although the value of your shares will have fallen drastically. Likewise, if a major shareholder goes bankrupt, she cannot sell the company’s assets to pay off her creditors.

What shareholders actually own are shares issued by the corporation; and the corporation owns the assets held by a firm. So if you own 33% of the shares of a company, it is incorrect to assert that you own one-third of that company; it is instead correct to state that you own 100% of one-third of the company’s shares. Shareholders cannot do as they please with a corporation or its assets. A shareholder can’t walk out with a chair because the corporation owns that chair, not the shareholder. This is known as the “separation of ownership and control.”

Owning stock gives you the right to vote in shareholder meetings, receive dividends (which are the company’s profits) if and when they are distributed, and it gives you the right to sell your shares to somebody else.

If you own a majority of shares, your voting power increases so that you can indirectly control the direction of a company by appointing its board of directors.5 This becomes most apparent when one company buys another: the acquiring company doesn’t go around buying up the building, the chairs, the employees; it buys up all the shares. The board of directors is responsible for increasing the value of the corporation, and often does so by hiring professional managers, or officers, such as the Chief Executive Officer, or CEO.

For most ordinary shareholders, not being able to manage the company isn't such a big deal. The importance of being a shareholder is that you are entitled to a portion of the company's profits, which, as we will see, is the foundation of a stock’s value. The more shares you own, the larger the portion of the profits you get. Many stocks, however, do not pay out dividends, and instead reinvest profits back into growing the company. These retained earnings, however, are still reflected in the value of a stock.

Mutual Funds

• Mutual funds are professionally managed investments that group investors' money, to invest in a Securities Portfolio, like stocks or bonds. When you invest in a mutual fund, you're buying a share of the fund, equal to a portion of ownership in its holdings. As the fund's total value changes over time, the value of your investment also goes up or down. If the underlying stocks or bonds pay dividends or income, you receive that too.

• Mutual Fund dividends are taxed as ordinary income, and capital distributions as either short-term or long-term gains, depending on how long the mutual fund has held the underlying investment.

DriveWealth offers our Partners the ability to transact in mutual funds both in the sandbox and production environments. The following are DriveWealth’s internal rules for executing orders in mutual funds:

• All orders are required to be submitted in NOTIONAL amounts, meaning that a mutual fund order has to be sent in terms of dollars
• Orders must be submitted prior to 1:00pm ET for same day execution. Any order received after this time will be placed for execution the following day
• Net Asset Values (NAV’s) are generally posted between 5:00pm-7:30pm ET, which is required to trigger an order stats update to “successful”
• Funds or positions that are a result of a buy/sell settle T+1, and will reflect as such in the account summary API
• There is no current mechanism in place to correct a trade that may have failed for same day execution. Meaning that if a same day trade was placed and subsequently failed at 5:30pm ET it is not possible to revise for another same day trade.

Fund-Specific Requirements

Certain mutual funds have specific restrictions or requirements. It is important to understand these constraints before selecting which mutual funds to make available in your offering.

• Required minimum investment amounts (e.g. $1,000 or $5,000 minimum threshold)
• Only specific account types can transact in the funds

Sandbox Testing

To begin testing mutual funds in the sandbox environment reach out to your Partner Solutions Representative with the tickers of the funds you want to be enabled. When in the sandbox environment if the account you would like to test trading mutual funds on is currently toggled to ignoreMarketHoursForTest : true, all mutual fund orders will fail. Please ensure this toggle is set to false if you are testing mutual fund trading in the sandbox environment.

Market Data

Mutual Fund prices show the net asset value (NAV) of the fund at the end of market day. The NAV does not update intraday, so there is no need to continually pull this endpoint to retrieve the most up-to-date NAV. Market data displays the prior day’s NAV, and can be generated through any of our 3 market data APIs found in the Market Data section of this document.

American Depositary Receipts (ADR’s )

• An ADR is a structure for U.S. investors to invest in a foreign company’s stock - an ADR trades on U.S. exchanges the same as any other stock.

• Functionally, ADRs are created by a depositary bank acquiring a large number of shares in the foreign company, and then offering them for sale in the U.S. through an ADR certificate, which may represent a single share or multiple shares of the foreign company’s stock. Examples of these instruments include Nokia (NYSE: NOK) and InBev (NYSE: BUD). ADRs trade just like any other equity on the DriveWealth platform: the market hours are the same, they are fractional, and market makers help ensure liquidity for shareholders.

• The depositary bank performs a number of functions to facilitate ownership of these assets, including translating investor materials to English, and converting dividends to USD. The depositary bank normally charges shareholders fees to cover the cost of these services, which are typically in the range of $0.02–$0.05 per share per year. These fees can be unexpected if investors are not experienced with investing in ADRs, as they can be charged directly against a customer account if a customer owns the ADR on the fee record date, disconnected from any purchase or sale. This means that customers looking to invest in ADRs should maintain a positive cash balance that can be debited when these fees occur. Often, depositary banks will simply deduct their annual fee from a dividend payout so there is no client impact, but this is not always the case.

• Some ADR investors may be entitled to preferential tax treatment, but this can require additional work. For example, the Belgium/US tax treaty rate for US residents is 15%, as of 2020. However, the depositary bank does not know the residency of their Receipt shareholders, and so will withhold from all dividends at the maximum withholding rate of 30%, and remit those funds to the Belgian tax authority. This means a U.S. person has doubly overpaid any foreign taxes due for owning shares in Belgian companies. The tax reclamation process, often not taken advantage of by retail customers, differs for every country and can necessitate filing an overseas tax return.

Foreign Private Issuers (PFI’s)

• Like ADRs, customers can also invest in international companies by investing in Foreign Private Issuers - similar fees and international tax consequences may apply. These instruments, such as Ferrari (NYSE: RACE), are very similar to ADRs, but their shares are listed directly by the issuing corporation, rather than a depositary bank.

OTC

• DriveWealth does not support the purchase of OTC securities, however we do support the liquidation of a position in an OTC security if a customer is invested in a security that gets delisted from an exchange. When a security is delisted from an exchange the following actions are taken:

• Partner is notified through their Slack channel by DriveWealth’s Listing Committee along with all relevant information.
• The security is moved from OPEN to INACTIVE, meaning that no new orders can be placed

To close out a retail customer’s OTC position, DriveWealth requires that the Partner send the following information to: [email protected].

• Customer Account Number
• Symbol
• Number of Shares

Once DriveWealth is in possession of this file, we will close positions out during the following time schedules:

• Opening: All orders must be received by 8:15 AM EST for market opening
• Midday: All orders must be received 1:00 PM EST- orders will be entered at 2:30 PM

DriveWealth’s process to close out these positions is as follows:

• Submit order to our executing broker to liquidate requested OTC securities
• DriveWealth receives a fill price and confirmation that shares had been successfully liquidated
• DriveWealth then creates a sell order in the customer’s account to reflect the fill price

Target Yield Fixed Income ETFs - Product Information

• DriveWealth’s mission is to democratize investing by providing retail investors access to products that allow them to benefit from the core tenets of investing: asset allocation, portfolio diversification, compounding, risk-adjusted returns and cost minimization. DriveWealth’s target yield fixed income ETFs, powered by YieldX technology, are now available for end clients to purchase through the DriveWealth platform.

The target yield fixed income ETFs are available to US based retail investors seeking:

• Portfolio diversification into fixed income
• Monthly dividend income
• Investment alternatives to low-yielding cash and cash equivalents

• Additional information about this new fund lineup can be found at DriveWealth's Fund Website

DriveWealth Steady Saver ETF

• Ticker: STBL
• Yield: 3%
• Volatility: Low

DriveWealth Power Saver ETF

• Ticker: EERN

• Yield: 8%

• Volatility: Moderate

• The DriveWealth ETFs will be actively managed by the experienced team of YieldX portfolio managers and quantitative analysts, leveraging their unique analytics platform, which aims to optimize target yield levels while minimizing the risk and expense taken for each unit of income. Each ETF may hold a mix of fixed income ETFs or individual securities that may consist of investment grade, non-investment grade or unrated securities across a range of sub-sectors, including sovereign, corporate and municipal debt in both developing and emerging markets.

• The DriveWealth Steady Saver ETF will be benchmarked to the Bloomberg Barclays US Universal Bond Index and YieldX Optimized Liquid Income Index.

• The DriveWealth Power Saver ETF will be benchmarked to the Bloomberg Barclays US Corporate High Yield Index and YieldX Optimized Liquid Income Target 6% Volatility Index.

• The YieldX Optimized Liquid Income (YOLI) indexes are independently verified and calculated indexes that have produced higher yields, less volatility, and increased diversification for income-seeking investors over the last decade.

• YieldX investment products and services combine powerful quantitative models with an experienced investment team vetting and implementing recommendations to deliver differentiated outcomes to investors. Both ETFs will be administered by the RBB Fund, Inc., an industry-leading platform for funds with approximately $15 billion in assets under management. STBL and EERN will be advised by Red Gate Advisers, LLC, as well as Vident Investment Advisory, who will serve as sub-adviser to the DriveWealth ETFs. US Bank will serve as the custodian, fund administrator, and transfer agent for the DriveWealth ETFs.