Equity trading focus | Retail trading performance | Darren Toulson
spread capture mark, i.e. inside the EVBBO spread. Averaging over all flow, FTSE-350 stocks are executed about 15% inside the spread, the small/mid cap ISDX stocks about 25% inside the spread. This means that a UK
retail investor will get price improvement of at least 15% of the EVBBO spread on their aggressive ‘deal now’ orders (also with a free 15 second option to trade). What does this mean from a
best execution standpoint? For many people, best execution for retail size trades often simply means that the trade should execute within lit primary market BBO prices. What’s clear from our results,
however, is that matching BBO or even EBBO isn’t ‘good enough’ – there are liquidity providers willing to quote well inside lit UK BBO prices for retail investors. So, any UK broker offering to simply match EBBO, with no potential for improvement, would not be achieving the best price available for their customers.
How about other European
markets? Countries in Europe have different ways of routing/ internalising/executing retail flow.We’ll give two examples, one for France and one for Germany. Fig 3, shows spread captures
(versus primary market BBO this time) of French retail flow executed on Equiduct’s PartnerEx exchange. Although the flow is executed at exactly EVBBO on PartnerEx, there are still some clear improvements to be had versus sending the same orders aggressively to the primary market. Fig 4, shows spread capture
of German trades executed on a regional exchange – Stuttgart – versus BBO prices on Xetra. Again there is clear price improvement with, in this case, a relatively large number of trades matching at Xetra mid-price. So the pattern is that, using
quite different microstructures, aggressive retail flow is typically achieving significant price improvement over prices that would be obtained by routing aggressively to a primary
market. For retail best execution, BBO (or in the UK, EBBO), is not ‘enough’. Finally, we might ask why
should these retail focussed trading pools offer apparently better prices than those offered on lit markets to institutions/ professional traders? The most likely answer is that in each of these venues, the counterparties to the retail flow can be fairly confident they are dealing with low frequency, ‘less toxic’ flow. As such, the risks of being picked off by HFT firms or suffering the adverse selection risk of trading the other side of a large, price-moving institutional block are reduced. Hence the liquidity providers can afford to be more generous. There are interesting
parallels here with the role of buyside Dark Pools / BCNs in the institutional space where, by being selective about who can participate, these venues can sometimes provide better outcomes to those who do participate. n *Darren Toulson is head of research, LiquidMetrix
Fig 3: Spread capture for French equiduct trades Figs 4: Spread capture for Stuttgart trades Spread Capture Histogram for All Avg. SC = 10.52%
250000 200000 150000 100000 50000
-2.1 -1.1 -0.1 Best Execution | Summer 2013 1.0 2.0 -2.1 -1.1 Spread Capture Histogram for All Avg. SC = 29.09%
30000 25000 20000 15000 10000 5000
-0.1 1.0 2.0 41
Trade Count
Trade Count
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