Retail flow: the new buy-side eldorado?


With close now accounting for 21% of average daily volumes, the challenge of continued intraday liquidity leaves institutional asset managers looking for alternative sources of liquidity.

While there have been recent efforts to improve access to close, the question is whether other sources of activity such as retail flows now also represent a valuable liquidity opportunity.

The increase in retail flows and investor appetite for meme stocks grabbed the headlines at the start of the pandemic, particularly in the United States where the combination of stimulus checks linked to COVID-19 and the reduction in sports betting opportunities acted as a trigger for the public to focus their attention on the capital markets. Europe has also seen an increase in retail trade.

The growth is evidenced by trading results released by Equiduct, the pan-European retail-focused exchange, which saw an 88% increase in Average Daily Volumes (ADV) for 2020 to 283 million euros, from 149 million euros. euros in 2019.

While European activity remains lower than that of the United States, a distinct trend is now emerging. The shift to e-commerce on mobile apps will further stimulate the appetite of retail investors, and tech-savvy generations are increasingly accustomed to fingertip trading. This is particularly attractive given the zero return on cash savings versus the promise of “zero fee” trading.

Traditionally, institutional traders have had little incentive to tap into this flow, given the relatively small order size and scarcity of transactions. However, that now looks set to change: 48% of buy-side companies would like to engage with retail, according to a survey conducted by Redlap Consulting of 30 global trading executives.

“We can receive thousands of orders of 10 shares rather than just one execution, but it is always in our best interest as there is no impact on the market and in some names of the FTSE 250 it can be 25 at 30% ADV – that’s the liquidity we want to engage with. ”said a large global asset manager.

The key differentiator for actively leveraging the retail flow will be automation. Asset managers who engage with retail service providers are fully aware of the size of orders the retail business will offer. However, if the process is fully automated, it doesn’t matter if there are one or 100 clips, this is the liquidity that the buy side needs and can effectively engage with.

Unlike the United States, the retail market is fragmented. In the UK, most transactions are executed through over-the-counter retail service providers, which are then printed on the site. In Europe, exchanges take place on national stock exchanges, while in Germany, regional stock exchanges remain predominant. The question is, who will be the retail liquidity providers of tomorrow that could help bridge the market gap between institutional and retail flows?

Market makers are also playing an active role in reshaping the retail landscape by aggregating the buy positions they get from retail into a central risk book. Then, they can interact with institutional investors on block liquidity, either directly via indications of interest (IOI) or indirectly via block platforms. Recent data from Alphacution highlights the growing role that market makers play in retail liquidity. As of November 2020, market makers accounted for 90% of the US Order Payment Flow (PFOF) market, up from 60% in 2011.

The opportunity to better leverage retail flows is multifaceted; As intraday liquidity dries up, asset managers must find the flip side of their business. Liquidity providers who can bridge the gap in the market and break down the wall between institutional liquidity and retail liquidity will provide their clients with improved access and the ability to provide best execution. This is important given the emphasis in the UK and Europe on orienting investments towards small and mid caps. The lack of liquidity in these stocks has long been the main deterrent for asset managers. The ability to access any retail interest in these names could help provide the liquidity asset managers need to be able to invest.

The use of PFOF continues to be heavily debated to ensure that retail investors understand the life cycle of their order and get the best possible result. Although this remains primarily an American phenomenon, European regulators should take it into account; Retail flows are an undeniable part of capital markets and whether it is PFOFs, retail service providers or neo-brokers entering the European retail market, the market needs innovation to lift the remaining barriers between institutional and retail flows. It is only when several sources of liquidity can interact together through better use of technology that capital markets will be able to effectively support the real economy.


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