There was an interesting article in the FT yesterday about how IG Index (the spread betting company) will now be connecting to Chi-X and, I assume, other MTFs too. The story reminded me of how MiFID is starting to permeate outside the immediate professional trading community and enter the consciousness of the public at large. My own experiences in this area have been mixed – I bought a bunch of shares the other day and, on the spur of the moment, decided to ask my broker what his best execution policy was and which venues they had considered before executing my order. I was surprised and disappointed with the response. My broker had only the sketchiest knowledge of what best execution really meant and an even hazier grasp of the different venues that have sprung up since MiFID was introduced 2 years ago. Most alarming of all, they seemed almost resentful that someone had dared ask “the MiFID question”.
Besides making a mental note to find another broker, this experience set me thinking about how far MiFID has (or has not) affected the retail trading community across Europe. It depends where you look – Holland and, in particular, Amsterdam seems to have always enjoyed a thriving almost semi professional retail sector. Italy is similar, but the rest of Europe doesn’t have anything like as active a retail audience. This divergence explains why several months ago one of Europe’s largest liquidity providers – Optiver – set up a joint venture with Holland’s Binck Bank called The Order Machine or TOM for short. TOM dispenses with the need for an exchange altogether as it allows retail order flow to interact directly with Optiver’s market making capabilities to the benefit of both the retail trader and Optiver themselves. It will be interesting to see if this is just a Dutch phenomenon or a pointer to the future of equity trading across Europe. If it is the latter, then we may see this model replicated as other Liquidity Providers build or buy MTFs so as to interact with order flow in a similar fashion.
Another dimension to this issue is the level of understanding amongst corporate brokers and main board directors of exactly how (and where) the stock of the firms they represent is trading.
In the simple pre-MiFID days you need only to look at the trade feeds from the LSE or other primary exchanges to get a good idea of the on and off exchange activity in your stock. It’s pretty different now. Take Imperial Tobacco for example – 18 months ago the trading of this stock was split mainly between the LSE and Chi-X. Last week it traded on over 12 separate lit and dark venues and each of these achieved a different VWAP. Also interesting is the average trade size which, aside from Liquid Net, was broadly comparable between the lit and dark arenas. This is of more than just academic interest as this breakdown will influence which executing broker you use and, ultimately, what kind of price you should expect to pay or receive. (You can see this for yourselves if you log in and use the new forwards/backwards buttons on the Fragulator)
Anyway, next time you buy or sell shares, don’t forget to ask your broker the MiFID question.
Well, I couldn’t agree with you more – even in Sweden, which apart from high taxes, long and cold winter nights, nowadays is a mecca for retail stock investors who can legally trade shares at zero cap gains tax (YES it’s true – feel the envy those of you who stashed money at 2% around the globe in various tax schemes) – for a ridiculous commission rate. Going even further, to the blue-chips – we are doing our best to educate them about what is going on around Europe – a lot of legwork actually, but someone got to do it.
I work for one of the larger Investment bank and MiFID (as well as its RegNMS counterpart) has been central to all execution policy since 2007. Although we have had enough resources to apply conceptual changes to our client’s order entry systems, our OMS, Booking and Settlement systems to comply with Best Execution models we still find little interest or knowledge from our clients – most still want to direct their orders to exchange. One interesting development is the ability for the client to instruct on smart order (best exec),algo and crossing, this may indeed drive fragmentation even further.
I’ve just read your latest blog with interest, and it seems to me that there is already a bit of a trend towards setting up retail-oriented off-exchange trading platforms along the lines of TOM. If I understand the model correctly, Knight Link offers a very similar proposition, allowing retail brokers to interact with Knight’s market-making flow, and Citi’s Citi Match dark pool in Europe is actively seeking to build up retail participation so it can replicate the success it has had with the US version, which was essentially started with retail orders interacting with the market-making flow of ATD.
However, both have noted that attracting flow from retail brokers is tougher in Europe than in the US. It certainly seems that US retail brokers are much more switched on than their European counterparts about the presence of alternative venues generally, as I think you found when you called your broker! Having indices that are compiled from more than just primary exchange numbers might help…