Exchanges to innovate for an increased sales flow


US stock exchanges should continue to innovate to allow institutions to interact with the increased volumes of retail transactions, which mostly take place off the stock exchanges.

Jack Miller, Baird

Jack Miller, head of institutional equities trading at Robert W. Baird & Co, said increasing retail volumes had brought topics such as order flow payment and order discounts to the fore. exchange.

In the United States, retail transactions are not executed on the stock exchange, but most are sold by retail brokers to market makers under “payment for order flow” arrangements, allowing brokers offer commission-free transactions to individuals. Market makers internalize the flow and capture the majority of the spread, in return for an offer to individual investors of a slight improvement in the exchange price.

“The increase in retail volumes has recalibrated trade expectations of retail investors to be more accessible,” Miller said. “Wholesale establishments want to participate in the retail flow and there are active conversations. “

The trend between over-the-counter volumes and volatility changed in 2020 according to an analysis of the structure of the US stock market by regulator SIFMA. Transactions previously moved on the stock exchanges during times of high volatility. However, in 2020 volatility increased 90.1% year-on-year and over-the-counter volumes increased 74.5%, more than the 46% increase in on-exchange volumes.

Source: SIFMA.

SIFMA said in its report: “Market participants also attribute this increase to: increased fragmentation after the addition of three new stock exchanges in September 2020; people got used to the higher level of the VIX and therefore learned to perform effectively off exchange under these conditions; and the growth of retail trade, which is often carried out over the counter.

The study continued that between the fourth quarter of 2019 and the third quarter of this year, exchange trades as a share of total market volumes declined while over-the-counter platforms increased.

“Over-the-counter trading on over-the-counter platforms now accounts for around a third of total volumes, with more than half of the volumes still being executed on exchanges,” added SIFMA. “The big jump in OTC sites occurred in the second quarter of 2020.”

Source: SIFMA

Cowen’s research department estimated in its 2022 themes report that only 30% of recorded U.S. equity volume is single, accessible, non-high frequency stock trading cash.

Jenny Hadiaris, Global Market Structure Manager at Cowen and Company, said in a video: “We have been following retail trends in accessible liquidity for several years, but the massive volumes in 2021 and regulatory headlines around the payment of order flow have made retail investors impossible to ignore in almost every industry and equity. This year. “

Cowan has incorporated inaccessible, equity-specific liquidity metrics into its algorithm this year to account for retail activity.

Jennifer Hadiaris, Cowen

“It was born out of customer frustration that volumes no longer seem to correlate with liquidity,” she added. “We do not anticipate any retail order processing overhaul in the coming years and accessible liquidity will continue to be a significant challenge for institutional investors.”

The company is also closely monitoring retail options activity which has increased over the past year and may result in directional movements in the underlying securities.

Retail data

Retail volumes are included in OTC transactions, but these volumes also include blocks and other institutional transactions, including the commitment of bank capital in institutional transactions. Miller pointed out the lack of transparency in retail volumes.

In November, the Nasdaq announced the launch of the Retail Trading Activity Tracker, which measures daily stocks and exchange-traded funds traded by individuals as well as buy / sell ratios per ticker. The data is developed from publicly available data and the Securities Information Processor (SIP).

Oliver Albers, head of data and investment intelligence at Nasdaq, said in a statement: “The increased participation of individual investors is rapidly changing market dynamics, and the Retail Trading Activity Tracker is the first of its kind to offer. general access to consistent and standardized information. on the retail trade activity.


Shane Swanson. Coalition Greenwich’s equity and financial technology expert in market structure and technology practice, agreed that the increase in retail transaction volumes has been significant over the past 12 months. He told Markets Media: “This is especially beneficial as long as investors have the right level of knowledge and awareness of the risks.”

Shane Swanson, Coalition Greenwich

He pointed out that the exchanges have innovated around retail flows, including the introduction of Nasdaq retail activity tracking and IEX Exchange improvements to its retail program, and he expects that this invitation continues.

In September, IEX Exchange announced that nearly a dozen retail brokers have joined the IEX Exchange Retail Advisory Committee (RTAC) to assess how the market infrastructure and the rules governing market operations can and should change as the participation of individuals in the equity market continues to grow. The committee will consult on the areas, including the proposed new order types; taking into account the impact of new regulatory requirements and proposed regulatory changes on the retail investor and its brokers

Ronan Ryan, president of IEX Exchange and co-founder of parent company IEX Group, said in a statement: Participation in growth in our markets.

Fergus Keenan, chief strategy officer at Adaptive Financial Consulting, the global e-commerce consulting firm, told Markets Media that the influx of sophisticated retail users has raised performance expectations for sites and accelerated the need to provide customized solutions.

“The stock brokers who currently provide services for the retail market have products from vendors that they put together, or maybe white label, and they understand that is not enough,” Keenan said. “We help businesses build resiliency, ensure 100% uptime, and design scalable architecture solutions. “

Keenan expects the market structure to evolve to provide multi-asset access points, including stocks and digital assets.

Impact of retail on liquidity

Retail investors reduce the risk of stock crashes by providing liquidity to stock markets after a market-wide liquidity shock, according to a study by the Karlsruhe Institute of Technology, The impact of retail investors on equity liquidity and the risk of a crash.

Research treated the COVID-19 pandemic as an exogenous shock to a processing group of stocks likely held by retail investors in March 2020 and caused sharp drops in stock markets and analyzed app data Robinhood trading.

“We are finding that stocks that are likely held by retail investors have significantly higher liquidity and lower price drop risk during the COVID-19 pandemic,” the newspaper said. “We conclude that retail investors are stabilizing stock prices, especially during times of financial market turmoil”

In addition, the impact of retail investors on the risk of a crash is more pronounced for stocks with low volatility, low turnover or low short-term interest. “We conclude that retail investors are not only uninformed contrarian traders, but rather act on the basis of certain information,” the researchers added.

They concluded that the study suggests that corporate financial managers should focus on attracting retail investors during times of financial market turmoil in order to keep stock prices higher, which could help raise capital. .

“Institutional managers should attract more funding from retail investors to avoid capital constraints when arbitrage opportunities are apparently the most profitable,” the report laments.

In addition, governments should provide more incentives for retail investors to invest in financial markets, as this could reduce the need for government and central bank intervention, which can lead to higher taxes, increased debt. and moral hazard.


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