Junior markets battle for private investors
Focus is spreading to retail clients
Two years after it became law in 30 European countries, most commentators would argue the European Commission’s high-profile trading act, Mifid, has achieved one of its aims – to engender competition between the main European trading venues.
In that time a new breed of quasi-exchanges, known as multilateral trading facilities, has emerged and taken market share from the large incumbent stock markets, which have responded by launching their own pan-European services.
This competition has forced new entrants and incumbents alike to increase their investment in services and cut the fees they charge for them: trends that should benefit the investor and, therefore, increase demand.
A closer analysis suggests Mifid has not been as effective for all investors, however. The directive may have paved the way for competition at the top end of the market, dominated by institutional investors and investment banks, but there has been little innovation in the market serving private investors.
Typically, retail investors have been serviced by domestic retail brokers that use the agency brokerage divisions of top investment banks to offer them international access.
The banks route the brokers’ orders to the relevant exchanges, but retail brokers have not traditionally been as much of a priority as the banks’ more lucrative asset management or hedge fund customers.
Consequently, the first wave of post-Mifid innovation, directed by the biggest investment banks, was aimed at the banks’ institutional clients while the retail brokers were overlooked. Europe’s main MTFs – Chi-X Europe, Bats Europe and Turquoise – are backed by the main investment banks and proprietary electronic marketmakers, such as Dutch firm Optiver and US brokers Citadel and Getco.
But a new breed of European trading system designed specifically for private investors has started to emerge in the past few months, marking what some traders see as a shift in the balance of power between investment and retail banks.
The relationship between investment banks and their conventional buyside customers has often struggled over the past year, forcing banks to look seriously at alternative sources of revenue. But these banks have also come to realise they need a mix of trading firms in their liquidity pools to make them effective.
Investment banks’ proprietary trading desks tend to trade in the same way, meaning it is less likely a trading venue can find a buyer and a seller if the trading community is limited to these firms.
Retail customers are different from their institutional rivals, and banks are only now appreciating that retail flow is valuable to increase crossing rates on their systems.
New ventures are now coming to market, catering for retail brokers trading stocks on behalf of their customers.
The Order Machine (Tom), a joint venture owned by electronic broker Optiver and Dutch retail banking group BinckBank, is one move into this market. The system currently allows BinckBank’s private investor customers to access the best prices available in selected stocks listed on European exchange Euronext. But Tom is looking to expand aggressively and link to other trading centres, including Chi-X Europe, which Optiver partly owns.
It also plans to include other trading partners and establish itself as the venue of choice for retail brokers trading European blue-chip stocks, a proposition investment banks cannot afford to ignore.
Pieter Aartsen, board member at BinckBank, said: “Since the start of BinckBank, our mission has been to provide private investors with the same opportunities as professional parties. Over the past year and a half, we have seen the appearance of alternative stock exchanges and new trading platforms. Unfortunately, these were not accessible to private investors.”
Henk van Arem, a director at Tom, said: “The introduction of Mifid two years ago was the trigger for this process. Retail banks, in general, have not created best execution facilities to provide their clients with access to multiple execution venues, but Binck is an innovator in this regard.”
He said the firm, which is “still in the process of setting up the service”, provided best execution, comparing the price being offered by Optiver, acting as a marketmaker, with the price showing on the underlying exchange.
If Optiver is offering the best price, the trade is executed on Tom’s in-house platform, which is attractive to customers because they do not have to pay exchange fees, but if the exchange order book is showing a better deal the order is routed there.
Jelle Elzinga, director of Optiver, said: “Tom charges lower costs than the traditional stock exchanges. As a result, liquidity providers, like ourselves, are in a position to provide better bid and offer prices. This encourages competition between traditional stock exchanges and alternative trading platforms.”
Tom is not the only example. Equiduct, the trading platform bought by Citadel three months ago for an undisclosed sum, is looking to roll out a rival service, supplying best execution services to private investors.
Matteo Cassina, president of European execution services for Citadel Securities, said: “Through Equiduct, Citadel Securities and other marketmakers will provide execution services to a wide range of retail brokers and other order flow providers, making Equiduct a destination of choice for the European brokerage community.”
Equiduct is set to receive a further boost early next year, when Peter Randall, founder and former chief executive of Chi-X Europe, becomes the chief executive of the firm, a move first reported by Financial News last month.
Randall’s switch from the institutional side of the business to focus on servicing retail brokers speaks volumes and underlines a pervading sense among traders that the retail market is going to be the next frontier in the escalating battle between Europe’s exchanges and investment banks.
Marcus Stuttard, head of the London Stock Exchange’s Aim, which offers retail brokers access to small and mid-cap stocks, said: “Post-Mifid, exchanges are facing increased competition for trading and reporting. This is a theme across the market and things are no different for Aim.”
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