Retail Matching Facility. Not much for retail.

23 Oct 2012

Difficult times for NYSE Euronext. The former monopolist recovered some percentage points in market share against BATS Chi-x, but trading volumes have declined. In the option market the serious competitor TOM is gaining speed  - market share of 29% in ASML options last week (pdf). That’s a lot.

The old exchange came up with new arms to defend its market share. The Retail Matching Facility (link). Brought as a tool to give retail investors better execution in stock trades. Can’t really find the retail angle in this.

The idea is this. Market makers can quote tighter markets in stocks for retail investors only. Their bids and offers are broadcasted in the regular market, but professionals can’t trade against them.

Retail flow is nice because it has a more random character. Anyway, the best bid and offer in the market will probably be dimed with 0,1 cent on both sides. The bid-ask spread in stocks is narrow these days, at least for modest size. And retail orders are of modest size. I believe investors won’t gain much from a better execution.

Situation A

Average Joe is buying 250 shares of Royal Dutch and ready to cross the spread. He may get a 0.1 cent better execution, paying 25 cent less for his transaction. He won’t even notice, his transaction fees are much higher than the spread.

Situation B

Suppose our Average Joe is placing a bid for his 250 shares. He is the best bid in the market. A retail market offer comes in, but alas – the Retail Liquidity Provider gets filled on his bid, 0.001 better than Joe.

In other words, this RMF could make execution for retail investors more difficult when they are not ready to cross the bid-ask spread. Same goes for the rest of the market participants, who will notice the quality of the market will be harmed.

Second, a better execution may not be the best execution. Prices on other platforms may be better – as suggested by Equiduct ceo in FT Alphaville. A complicated, fragmented market with special corners for retail investors is the proposal.

I could be mistaken, but this doesn’t sound like a great deal for investors. Euronext doesn’t care at all about retail traders (check the transaction fees) – it’s another move to block the competition. Creating new barriers of entry or locking in the customers.

6 Responses to Retail Matching Facility. Not much for retail.

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anonymous

October 24th, 2012 at 5:34 pm

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anonymous

October 24th, 2012 at 8:42 pm

‘He won’t even notice, his transaction fees are much higher than the spread.’

that’s true, bid-offer spreads are 10-20bps, on 50k clip that’s 50-100, but for realistic retail 10k clip, that’s 10-20, comparable to 10-12 broker/exchange fees.

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anonymous

October 24th, 2012 at 8:44 pm

Wed 24 Oct 2012, 15:30

Euronext TOM must admit to NYSE Liffe

AMSTERDAM (AFN) – Fair Company NYSE Euronext, Option broker TOM (founded by BinckBank, Optiver and ABN Amro) immediate and unconditional admission as a member of its derivatives NYSE Liffe. That the court in Amsterdam Wednesday determined.

TOM (The Order Machine), went to court last year after the trade fair business unconditional access to the options market had refused. The judge ruled Wednesday that NYSE Euronext a fine of 100,000 euros to pay for each day that the failure continues, up to a maximum of 5 million euro.

NYSE Euronext showed Wednesday that the ruling, fully in line with expectations”. The exhibition company had the unconditional membership talks with the option broker already attached to both TOM and the court.

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anonymous

October 24th, 2012 at 8:45 pm

‘Creating new barriers of entry or locking in the customers.’

All the barriers and fragmentation add to slippage in the market, simple 2-3 venues providing simple trading facility would keep competition healthy both for exchange and trading business.

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anonymous

November 27th, 2012 at 4:35 pm

PI is in 1 tick increments. Good luck MM that.

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anonymous

November 27th, 2012 at 8:25 pm

what’s PI and why is 1 tick increment making it difficult to MM?

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