Nicky Maan

Through the collaboration, Spectrum Markets is expanding its client reach across Europe to include high-end retail traders while sino clients will benefit from increased trading hours – 24/5 capabilities – for the first time.

In addition, sino will now offer after-hours trading in US stocks and other global markets.
 
“By joining forces with sino AG, we are expanding our end client reach, offering sino’s book of high-end retail traders a superior hours offering and maximising opportunity in the market,” said Nicky Maan, chief executive of Spectrum Markets.

Baader Bank is acting as an intermediary through a strategic collaboration.

Read more: Baader Bank becomes latest trading member to join Spectrum Markets

sino’s offering is “tailored to meet the diverse needs of heavy traders in Germany”. Neal Feist, chief trader of sino, explained: “Our partnership with Spectrum represents a significant stride toward enhancing our existing offering. 

“As our clients take advantage of Spectrum’s extended trading hours and liquidity, we remain responsive to their evolving needs, ensuring our product offerings continue to meet these demands.”

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In the absence of immediate sources, we may place the order in our internally developed retail algorithm wheel. This will agnostically place a UK retail stock with one of the specific algo retail brokers in the wheel and attempt to access retail liquidity within the selected brokers systems, who will also be accessing the retail service provider (RSP) network. Hopefully, this will gain access to retail liquidity which may not be otherwise obvious.

Using retail brokers algo products as above should be a useful tool in the search for such liquidity. However, the challenge for the buy-side is to find out which brokers are more likely to be trading in specific names, and at what times of day retail flows appear.

In an ideal world, this information would be automated into our Execution Management System (EMS), so that the retail wheel itself can either choose or recommend which broker to select to access liquidity in the most efficient manner.

Can platforms be leveraged to access liquidity more effectively?

All of the above refers to UK equity retail flow and the RSP network. We are aware that most major European countries have increasing volume of retail flow, which is currently difficult for institutions to access, or indeed know how to access. This may be due to a number of reasons, for example some brokers may choose to keep retail and institutional flows separate.

As retail volume and especially value increases, it would be useful if these flows were accessible to institutions. Furthermore, for effective and efficient access, it would be useful if this could be traded electronically.

As the brokers in question are possibly smaller regional or national brokers, they may lack the economies of scale or technological capabilities to create similar algo products used elsewhere. Hence this continues to be a challenge to effectively access these retail flows.

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In 2023, Spain joined a growing list of European countries set to introduce new restrictions on instruments aimed at retail investors, which would ban the promotion of CFDs and restricting leverage on other instruments.

In response, none of the surveyed retail brokers either strongly or somewhat agreed with Spanish regulators’ intentions, while 69% strongly disagreed with them.

Looking at the impact these regulatory restrictions would have on listed markets in the EU and UK, just over half (51%) of responds believe there would be an increase in listed volumes, with 10% of that portion expecting a significant increase, while 41% expect a slight increase.

Meanwhile, only 14% of respondents expressed that there would be a decrease in listed volumes, while 34% expect no change.

The report found that should retail flow to listed markets increase, there would be significant benefits.

Proprietary trading firms which took part in the survey predict that significant flows into listed derivatives markets would improve liquidity, provide greater opportunities for institutional firms and increase revenues.

Of those surveyed, less than 10% predicted that the move would result in increased volatility in the market.

“This report suggests that restrictions on retail investment in bilateral products such as CFDs will boost engagement with listed derivatives markets. This will bring greater liquidity and more diverse flow to the markets in Europe,” Will Mitting, founder of Acuiti, told The TRADE.

“For incumbent institutional firms this provides an opportunity. As volumes in listed markets grow, institutional clients are likely to trade more while some institutional sell-side firms see opportunities in targeting retail investors if they trade listed derivatives.”

Mitting did, however, emphasise that the report also found that restrictions on retail flows to CFDs will result in retail focused brokers expanding their offerings to institutional investors, “which will increase competition for incumbent institutional sell-side firms”.

“These shifts are likely to cause significant disruptions and innovation in European institutional markets,” stressed Mitting.

Looking at how a ban could impact competition in institutional markets as retail brokers seek to replace retail revenues with institutional flows, no surveyed sell-side respondents expected a significant increase in competition, however, 53% stated that they expect a slight increase in competition, while the remainder (47%) expect no change.

Acuiti stated that this potentially reflects an under-appreciation of the challenge and ambitions of retail brokers found in the report, emphasising that while clearing firms are likely to see benefits from retail brokers moving into futures and options, execution-focused focused brokers will inevitably face grater competition.

“Increased retail participation in the listed derivatives space will only accelerate the sell-side demand for modern, scalable technology,” Francesco Margini, chief product officer for cleared derivatives at ION Markets, told The TRADE.

“This is essential for supporting large scale client onboarding and significantly increased transactional volumes across execution and clearing.”

The report highlighted that the growth of retail investing added depth and improved liquidity in US derivatives markets, attributing it as a key factor in the significant growth that US listed market have seen since 2019.

Retail brokers which have the advantage of being technology-led, will likely put them in good stead as they approach listed and institutional markets.

Despite the challenges that may arise due to regulatory restrictions for European retail brokers, Acuiti concluded that with challenges comes opportunities and the potential for reinvention for the affected parties.

The post Retail regulatory restrictions could boost European listed derivatives markets, but how will institutional brokers be affected? appeared first on The TRADE.

Eligible clients of Interactive Brokers Hong Kong trading cryptocurrencies will now be able to transact and manage their portfolio through a single platform with a unified view.

The development will also allow clients to benefit from centralised cash management with the ability to trade cryptocurrencies such as Bitcoin and Ethereum alongside stocks, options, futures, currencies, bonds, mutual funds, ETFs, event contracts, cryptocurrency futures and futures options – all from a single account and interface.

“As demand for cryptocurrency exposure as a means of diversification continues to rise, we are pleased to offer investors in Hong Kong a straightforward and cost-effective way to allocate a portion of their portfolio to digital assets,” said David Friedland, head of APAC at Interactive Brokers.

“Our single unified platform lets clients worldwide easily invest across a broad range of global products, and the retail investor community in Hong Kong will benefit from the ability to access digital currency markets without opening and maintaining different accounts at multiple brokers and exchanges.”

Interactive Brokers launched cryptocurrency trading in Hong Kong with the first SFC-licensed digital asset trading platform in Hong Kong, OSL Digital Securities.

Cryptocurrency trading for eligible professional investor clients of Interactive Brokers Hong Kong was introduced on 14 February.

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The BondbloX platform will allow individual investors to buy, track and trade bonds through the integrated app, essentially providing digital access to the platform via a smartphone.

The platform uses an exchange model for all-to-all order matching which differs from the over-the-counter model that exists with phone dealers servicing individual investors presently.

According to the firm, this will allow individual investors to access transparent inter-bank bond pricing with no hidden spreads.

BondbloX offers a range of USD and SGD denominated corporate and sovereign bonds, with plans to offer trading of US treasuries and US corporate bonds at a later date.

“We want to simplify access to bonds, giving a new audience the opportunity to diversify their portfolios and lock in these higher yields,” said Rahul Banerjee, chief executive and co-founder of BondbloX.

“We’re excited to be able to reach individual investors not only in Asia, but across the world, and democratise access to this exciting asset class through fractional investing.”

Backed by Citi and MassMutual Ventures, BondbloX has been active within the institutional market since 2016. The exchange is also regulated as a Recognised Market Operator (RMO) by the Monetary Authority of Singapore (MAS).

Read more: Is Singapore set to become the next major trading hub?

Last month, Citi was revealed as the first digital custodian participant of BBX for the institutional market. The move allows certain Citi clients to become BBX participant and begin trading both fractionalised and full-sized bonds almost immediately.

Over the past year, several institutions have expanded their offerings to cater to retail investors. In August, Virtu entered a strategic alliance with InvestorLink to offer retail investors improved access to primary markets.

As part of the partnership, Virtu’s network of retail broker-dealers can access primary markets and secondary market liquidity via an integration with InvestorLink’s primary market order management and artificial intelligence based matching platform.

Elsewhere, LSEG launched a new retail trading service with Hudson River Trading in April, designed to support European retail brokers in meeting best execution obligations.

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As part of the collaboration, Virtu’s network of retail broker-dealers will gain access to the primary markets and to secondary market liquidity via an integration with InvestorLink’s primary market order management and artificial intelligence based matching platform.

“We are delighted to collaborate with InvestorLink to help connect retail brokers with hard-to-access investment solutions,” said Stephen Kay, global head of broker-dealer sales at Virtu.

“By combining Virtu’s connectivity to all major custodians, clearing firms, and TAMPs with InvestorLink’s advanced primary market technology solutions, we are confident in our ability to drive significant value for all stakeholders.”

Read more – The relentless rise of retail trading: How can the institutional market join the dots to encourage investor access?

The news follows several other initiatives announced throughout this year as the retail segment continues to cement itself as a liquidity contributor in the markets.

In April, the London Stock Exchange Group (LSEG) launched a new retail trading service aimed at supporting European retail brokers in meeting best execution obligations and delivering price improvement.

Quick to follow was Euronext which confirmed plans to launch an expanded retail trading service as part of its quarterly results in May.

“By leveraging our technology platform, we’ll connect Virtu’s retail broker universe directly to the primary capital markets to support the efficient distribution of IPOs, follow-ons, municipals, and private funds at a scale unavailable in today’s marketplace,” said founder and managing partner of InvestorLink, Matt Michel.

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Retail investing is an ever-evolving space. Its role and the way it interacts with institutional investors differs region to region.

So, what does the rise of retail look like empirically? How can traders best engage with the retail market within the institutional framework? What needs to change, and how do we join those dots?

The role retail is currently playing in the market differs region to region, however panellists agreed that the Covid-19 pandemic had caused a spike in activity in the market globally. 

Wail Azizi said: “Historically retail has been anywhere between 2-3% in Europe up until the Covid era where that spiked to 5-6%. I think the importance of retail far outweighs the percentage of activity that retail represents in the market.”

Dirk Donker added: “Covid has been a main accelerator for retail. For the moment we have seen retail stepping back but we believe that the population of retail investors will grow. We can’t just rely on our houses, pension funds, and saving plans anymore.”

The panel also unpacked exactly what retail investors are focused on, why investment in big US names has historically happened, and whether this is set to continue.

Azizi said: “The more investors are financially literate, the more they will venture away from the household names and big index constituents to more unchartered territories, as seen with GameStop.”

The global landscape

Expanding on this, panellists agreed that the role of retail in the current landscape not only differs continent to continent, but also country to country and touched on how societal customs play a significant part in retail participation across Europe.

Donker said: “In Europe, there is a very diverse landscape across the countries. For example, Italy’s [retail activity] is more than 20% and Norway as well, and in Ireland there is also a big retail population, but then in France and the Netherlands we only see around 3-5% of retail. This is not even close to the same level as in the US. It’s in people’s DNA to invest in capital markets in the US. It’s part of creating their financial future – not relying on pension funds is important. The scope of products is different compared to Europe.”

He added: “It’s a matter of divergence in Europe, we have a lot of retail investors, but we are still very domestic focused.”

The experts highlighted the Italian market’s preference for fixed income trading as a key example of how cultural norms can play a part in trading activities.

Nicky Maan said: “We’re looking at deep individual cultures within one continent. In Italy you see one of the highest levels of cash savings and the least amount of mortgages in property – it’s part of the Italian culture. Their interest in fixed income comes from the ‘fixed’ aspect. If you look at the bond market, the savings market, and you look at the use of leverage in Italy it’s not a coincidence that fixed income is something that does very well.”

When it comes to harmonising the landscape between the US and the rest of the world, this fragmentation within Europe was highlighted by panellists as a noteworthy stumbling block. However, harmonisation, the experts agreed, is inevitable as retail participation grows.

But in practice, how is harmonisation achieved? Is data access the key?

Azizi commented: “More harmonisation of the access to data is required. From that perspective, the CTP [consolidated tape project] plays a role in facilitating that simplification just like in the US. The question is – to what extent did that easy access to data in the US generate more retail business? It’s a combination of a lot of things that would facilitate that harmonisation, such as the capital markets union (CMU) and the revision of Mifid (we now see retail being at the heart of that review which was not the case previously), and the harmonisation of the tax regime and the fiscal incentive.”

Donker added: “We [Euronext] are afraid that the CT will be used as a validation for executing retail on a systematic internaliser or on a dark pool and this will come to the detriment of the multi-lateral order book. Retail flow will be moved away from multi-lateral trading platforms and this is where we are concerned – if we need to build a consolidated tape let’s do it together between the exchanges.”

It’s widely acknowledged that the ever-growing rise of retail has a positive correlation on market liquidity. Delving into this further, Martin Hendry explained: “If you take the institutional element out, retail investors trade in terms of frequency not volume on a day-to-day basis and that liquidity is interesting. Ten or 15 years ago, if you wanted to acquire part of a smaller company you’d speak to a market maker (RSP). However, now we have direct algorithmic routes to the RSPs. I can interact with that RSP liquidity and I can find the best price for that underlying retail client, so the retail client is getting the best level versus the competition.”

He added: “It’s become a lot more efficient due to technology, and that straight-to-market process is something that holders of these stocks should really look at to use that efficiency.”

The times of day retail traders operate also tied into this. Hendry confirmed that “the first two hours of the day are typically an opportunity to take advantage of retail liquidity and use that ‘non-toxic liquidity’. It sets price formation first thing.”

Speakers touched on market hours in their discussion, highlighting an increased appetite from retail investors to trade after hours.

Donker said: “We are seeing a bigger demand for trading ‘after hours’. [To have more of an overlap with the US] is absolutely an element that we need to consider because a lot of the population of Europe is trading US stocks so in that sense we need to align.”

Azizi added: “The main thing with retail is event-driven trading. Nothing else […] The main outcome here is event-driven trading as opposed to systematic trading or strategy trading or time-weighted trading.”

Institutional interaction

Delving into how retail and institutional investors are interacting, panellists discussed how common direct access is, in particular on the buy-side.

Hendry said: “To estimate, maybe two out of three are still using the traditional order to market maker route. Two or three providers have developed algos in the last couple of years. It’s growing. The UK works really well in terms of the interaction with the platforms and the RSP machine helps. Venturing into Europe as an institutional investor I would like an algo that could interact with the RSP – or the RSP equivalent – across Germany, France, Norway etc. To have that all in one place would be hugely valuable. The various structures and set ups and relationships in various countries make that quite a barrier.”

Azizi added: “We’re seeing more of institutional seeking to interact via routes such as the RSP, into non-RSP environments – which is basically the rest of Europe. This is a good thing for the retail to benefit from additional liquidity from firms that have most of the inventory.”

 He added: “The value of liquidity coming from an asset manager or a hedge fund – someone who has inventory and that natural liquidity – is important and adds value to the market because it doesn’t withdraw necessarily during volatile markets.”

Donker highlighted that there were elements that may need to be closely monitored as the interaction develops: “If the strength of institutional seeking direct interaction with retail would come to the detriment of multilateral platforms, the spread will widen and the retail will not be part of the price discovery process, so market quality will deteriorate. That is something we need to watch carefully.”

Market infrastructure 

The panel also touched on regulation and market structure, and the role the two are playing in fostering or hindering retail participation globally.

Azizi highlighted the similarity between China and the US, the largest and second largest retail markets respectively: “China has 212 million retail investors and there is no secret that that is down to organisation. It’s almost one single market. The US comes second as the largest retail market in the world and it is the same story here. Post-trade it is very much harmonised compared to Europe.”

Mann compared the situation in Europe: “The flipside of course is when you have competition you increase offerings. There are areas of regulation in Europe that are a little bit more sophisticated than its peers but it does have the downside that it is not completely harmonised and I think that has pros and cons both for retail and for institutions.”

Speaking on how to enhance retail trading, speakers agreed that it is post-trade where there is most to gain in Europe. A lot has been done to develop the execution side of things for retail, such as zero fees and low transaction costs, and post-trade processes are lagging behind, the panellists concurred.

Azizi: “In the trade space, we’ve seen dedicated venues that are specialised in improving that execution or access for retail. That’s something that doesn’t exist in the post-trade world. Clearing and settlement are done exactly the same way everything else is done, whereas the trade size is different, the trade frequency is different, the risk profile of retail trade is by definition very different to institutional.”

Mann: “Post-trade is really fragmented in Europe and is one area where if consolidation were to occur, it would both make life easier for other entrants […] The more you can reduce the friction in the back end, the more you would have a cost benefit and therefore lower the barriers to entry.”

Looking to the future 

Looking at the next few years, panellists were asked how retail might operate differently.

Azizi: “A CCP is sooner or later going to fail in Europe, and how are we preparing for that? Retail is very small when it comes to market share or volume of business compared to other businesses […] so my view is that eventually post-trade will go through a consolidation phase to eventually fight those risks of failure and from there, retail would come at a later stage.”

“For now, the first steps are getting more retail into the market, increasing that market share from a trading perspective and from a volume perspective, which will naturally drizzle into the post-trade world.”

Retail participation has been growing quickly and becoming increasingly sophisticated since the massive market movement seen in 2021 with the meme stock saga. Panellists discussed whether safeguarding against these events going forward is a focus for institutional investors.

Azizi added: “Of course it’s a low probability, but also never say never. Risk controls are important. Both for the retail brokers but also for the institutional interacting with those retail.”

Hendry on the other hand expressed that it was a one-off case: “It was a perfect storm, people had more time on their hands, more cash to spend, and a social media presence promoting that trade idea to millions of people. I don’t think we are going to see it again.”

The post The relentless rise of retail trading: How can the institutional market join the dots to encourage investor access? appeared first on The TRADE.

The retail investment session at FIX EMEA 2023 last week dubbed itself “the panel of inspiration” – and with a full hall and standing room only, it was clear that the topic has made itself relevant to a broad swathe of the industry. Moderated by Dr Robert Barnes, the panel explored the increasing importance of the retail investor space on the institutional market – and why incumbent players cannot afford to ignore its influence. 

The panel kicked off with a brief survey that illustrated the integral part that retail plays. Almost three quarters (70%) of the crowded room confirmed that they traded on their own account, with around 86% self-designating as retail, while 14% termed themselves professional investors. When it came to equities, around 58% used their retail service provider (RSP) quotes, while 38% used orderbooks and 4% still used voice trading over the phone. Crucially, 95% of the audience confirmed that their broker did not offer direct access to midpoint order books for trading, while 80% said their broker/wealth manager did not provide them with execution quality analytics.  

The results highlighted one of the key challenges within the retail trading space – the unequal availability of information. “We urgently need to improve retail access to market data, at affordable prices,” said a panellist.  

Another challenge is the difference in retail culture between different regions. While the US and Asia are very retail-centric, and investing is seen as both accessible and exciting (one panellist noted that “all the sexy stocks are American”) – while in the UK and Europe, investing is seen as far more difficult to access and the markets are dominated by institutional players.  

“In the US, retail trading is fun. How do you change attitudes in Europe to drive retail trading?” asked a panellist.  
In the US, one panellist cited a figure from Nasdaq suggesting that around 34.5% of the market was retail, while between January and February, $1.5 billion per day flowed into US stocks from retail investors – driven in part by strong Asian appetite. But the same is not happening in Europe.  

“In 2000, 39% of UK pensions were in UK equity. In 2020, just 4% of UK pension money was in UK stocks. The trend is very much a downward decline,” said a panellist.  

However: “It’s not always helpful to compare Europe and the UK to the US, especially with regards to market structure and investor culture,” warned another. “In Europe, there has always been a heavy bias towards savings accounts rather than using financial markets. If we want to solve the issues that Europe faces in terms of retail participation, it might be better to focus on the specific challenges rather than on comparisons.”  

According to figures provided by a retail investor platform, pure volumes traded in retail pre-Covid stood at around £300-400 million. During Covid, that spiked to well over £1 billion per day – but post-Covid, those volumes have now normalised back to pre-pandemic levels. By comparison, US volumes did not sink back, but remain higher than pre-Covid times. “Why are all these people no longer to looking to invest?” asked a panellist

In order to encourage retail participants into the trading space, urged the panel, existing market participants must work harder to join the dots and provide access. “It’s shocking to think that an institutional algo can’t trade retail because there still isn’t a platform that allows this,” said one. “It’s 2023 – what’s going on?” 

Market makers also have a role to play – by providing liquidity to retail platforms, and by setting up specific models to serve retail customers. However, some panellists raised concerns around the European single market maker model, often seen in Germany, where a trading venue is set up as a multilateral exchange but has just one market maker that serves all retail brokers on the venue – resulting in a lack of competition for that order flow. “The regulation tends to focus on payment for order flow (PFOF) when really, it should be looking at the anti-competitiveness issue,” said a panellist.  

Read more – Peel Hunt’s Alice Lucas on retail investor involvement 

Education is another crucial element of retail access: both early education at school level, and investor education through access to market data. The London Stock Exchange, for example, has waived market data access fees for retail brokers – but the panel still emphasised that the playing field needs to be levelled across Europe with regards to both education and issues such as PFOF. 

Alice Lucas of Peel Hunt and Laurie McAughtry of The TRADE talk retail investment at FIX EMEA 2023

“When it comes to investor education, it’s incumbent on institutions to get more involved. We need to cater to the shorter attention spans of younger investors, through new channels such as social media,” suggested one panellist. 

In the UK, another step that could encourage retail investor participation might be a review of the current stamp duty reserve tax (SDRT) treatment. At the moment, this stands at 0.5% of every share purchased – a prohibitive rate, that can make retail access into a big name very expensive.  

“Is there a way that we could ask the regulator to remove stamp tax for the retail investor?” asked one panellist. “Or if not, could it be payable on the way out rather than on the way in?” 

Either way, the panel agreed that encouraging the retail market is crucial in order to grow the pie for everyone – and, particularly, to enable the institutional market to access small to mid-cap liquidity.  

“At the moment we’ve got a fragmented market. It’s difficult conditions, it’s expensive post-trade. We need to improve the workflows, we need to reduce frictional costs, increase accessibility, and drive technology innovation and infrastructure around execution. That will encourage people to trade, and that will benefit everyone across the market,” concluded a panellist.  

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