Equity trading focus | Retail trading performance | Darren Toulson


Is simply achieving EBBO good enough?


Darren Toulson* of LiquidMetrix reviews the trading performance achieved by retail investors across different European retail trading mechanisms.


I


n the UK most trading conducted by retail investors happens on-exchange but ‘off- book’. Retail investors, most of whom trade online using broker websites, will send a Request for Quote (RFQ) to their broker who will use an RSP Network to elicit two-way quotes from up to 40 market makers. These quotes are good for at least 15 seconds so the broker can present the retail investor with the best price available and give them the option to accept that price and conclude the deal. Best execution for the


UK retail customer therefore relies on two factors. Firstly, by convention, market makers provide two-way quotes at or


inside the best bid/offer and usually with volumes greater than available on the London Stock Exchange. Secondly, the competitive nature of the RSP network means that the price offered may not simply match the LSE BBO price, but may actually improve on it. This is the theory; how about


the evidence? Figures 1 & 2, show spread


capture histograms for different sets of retail trades executed in UK stocks during May 2013. They are created by taking each retail trade and comparing it’s execution price with the volume weighted market wide EVBBO price, i.e. the best price a Smart Order Router (SOR)


Fig 1: Spread capture for FTSE 350 stocks Spread Capture Histogram for All Avg. SC = 14.81%


50000 40000 30000 20000 10000


-2.1 40 -1.1 -0.1 1.0 2.0 -2.1 -1.1


could aggressively execute that order size, using lit liquidity on the LSE or any lit MTF. A value of 0 for spread capture means that the price achieved was the same as aggressive EVBBO, a value of 0.5 means the price achieved was EVBBO mid price, i.e. capturing 50% of the EVBBO spread. Fig 1, shows spread capture


frequencies for around 100,000 retail trades executed on UK FTSE-350 stocks. Fig 2, shows around 50,000 retail trades executed in small/mid-cap stocks that were reported to the ISDX exchange. What’s striking is that in


both cases, execution prices are mainly to the right of the 0


Fig 2: Spread capture for ISDX reported small / mid cap stocks


Spread Capture Histogram for All Avg. SC = 23.78%


8000 6000 4000 2000


-0.1


1.0


2.0 Best Execution | Summer 2013


Trade Count


Trade Count


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