How fractional investing works behind the scenes

This article provides a high-level overview of how fractional investing works. The exact systems, processes and technologies used behind the scenes may evolve over time, and the examples below are intended to illustrate the general principles involved.

If you've already read our article on fractional shares, you know that fractional investing allows you to buy part of a share instead of needing enough money to purchase a whole one.

But how does that actually work behind the scenes? The short answer is that public stock exchanges trade whole shares, while Lightyear's fractional investing engine helps bridge the gap between the amount you want to invest and the way shares are traded on the market.

Public stock exchanges are designed to trade whole shares. If an ETF is trading at €120 per share, an exchange can execute an order for 1 share, 5 shares or 100 shares. It cannot typically execute an order for 0.17 shares. That's true regardless of which broker you use.

To offer fractional investing, brokers need a way to bridge the gap between the amount a customer wants to invest and the way shares are traded on public markets. This is one of the core functions of a fractional investing engine.

Every fractional order on Lightyear starts in one of two ways:

• Share-quantity order:"Buy me 1.5 shares of VWCE." You decide how many shares you want, and we calculate the cost.
• Cash-quantity order:"Buy me €180 of VWCE." You decide how much money you want to invest, and we calculate how many shares that amount represents.

Although these order types feel different, they often lead to the same result. Let's assume VWCE is trading at €120 per share. In the examples above, if placed at the same time, both orders would result in approximately 1.5 shares being purchased.

Behind the scenes, these orders contain two components, sometimes referred to as "legs". In our example, the whole-share leg would be for 1 share and the fractional leg would be for the remaining 0.5 shares, resulting in a total position of 1.5 shares.

This allows you to invest the exact amount or quantity you've chosen, even when it doesn't correspond to a whole number of shares.

Using our earlier example of a €180 investment in VWCE (approximately 1.5 shares), here's a simplified view of what happens behind the scenes:

1. You place your order
2. The order is split into its whole-share and fractional-share components
3. The whole-share component is executed on the public market
4. The fractional-share component is fulfilled using shares held by Lightyear to support fractional investing
5. You receive a single completed order in your account, showing one average execution price and one position

If your order contains only a fractional component, the whole-share component step is skipped, but the same principles apply. The order is fulfilled using Lightyear's fractional investing infrastructure and priced using the methods described below.

While there may be multiple steps behind the scenes, your experience remains simple. You'll receive:

• One order confirmation
• One average execution price
• One position in your portfolio

The additional complexity exists behind the scenes so that investing can remain straightforward from your perspective.

A common question is where the price of a fractional share comes from. The short answer is that fractional prices are always tied to real market activity. They're not manually set by Lightyear and aren't based on an arbitrary internal price.

Depending on the type of order being processed, pricing may be derived from:

• A recent market execution: If your order includes a whole-share component that is executed on the public market, the fractional component will generally be priced using that same execution price.
• Recent market activity in the same instrument: For purely fractional orders, pricing may be based on a recent market execution in the underlying instrument.
• Current market data: Where appropriate, live market prices may be used to ensure pricing remains aligned with prevailing market conditions.

When you place a fractional order, the price is always linked to real market activity and current market conditions. Although the mechanics behind the scenes can vary depending on the order type and market conditions, the principle is straightforward: fractional investing should reflect the same market prices that underpin whole-share trading.

To make fractional investing possible, Lightyear maintains a pool of shares that can be used to support fractional transactions. This is a common approach used across the industry because public exchanges trade whole shares, while customers often want to invest amounts that result in fractional holdings.

Returning to our earlier example, if you purchase 1.5 shares of an ETF, the whole-share portion can be executed on the public market, while the remaining 0.5 share is fulfilled using shares held by Lightyear for fractional investing purposes. This inventory exists specifically to facilitate fractional investing and help ensure customers can invest the exact amount or quantity they choose. The inventory is continuously managed using public market transactions and remains connected to the same underlying market as whole-share trading.

We believe investing should be easy to use without being a black box. Fractional investing gives you more flexibility over how you invest that involves additional processes behind the scenes, but the principle is straightforward: helping customers invest the amount they choose while keeping pricing aligned with the underlying market. Understanding how these processes work can help you make informed decisions and build confidence in how your investments are handled.