Best Execution Debate Hots Up in Europe as NYSE Euronext Readies New Retail Venue

Terry Flanagan

NYSE Euronext’s new offering in the retail trading space in Europe is causing quite a stir.

In a bid to recover lost volumes to alternative trading systems in the region, primary exchange operator NYSE Euronext is set to launch, from January, a new trading venue targeted primarily at retail investors.

The new service, to be called the Retail Matching Facility (RMF), will allow NYSE Euronext member banks and brokers to execute their retail order flow via the facility—and away from high-frequency traders and institutional investors—on its main markets in Paris, Amsterdam, Lisbon and Brussels.

NYSE Euronext says the new platform will meet all pre- and post-trade MiFID requirements and will allow retail investors’ orders to be eligible to trade with both retail liquidity providers, whose role will be to provide buy and sell quotes in the RMF, and NYSE Euronext’s central order book.

“What we are doing with this program is we are creating this additional level of liquidity which is provided for by these liquidity providers,” Alicia Suminski, head of market and product development, European equity cash and derivatives at NYSE Euronext, told Markets Media.

“The objective is to offer retail brokers liquidity in the central limit order book and that liquidity is aimed only at retail and is in direct competition with the order book so there is no special provision given to the retail liquidity providers.

“The aim is to promote a more competitive, transparent environment for retail investors than they currently achieve through bilateral, internal arrangements with intermediaries.

“What really differentiates us is that it sits on top of a very liquid order book and is completely open so any investment firm wishing to provide liquidity on this program can do that.”

NYSE Euronext says that if the retail liquidity providers’ quotes are not competitively placed then the retail investors’ orders will automatically trade with NYSE Euronext’s central order book, thus preserving its order flow diversity.

However, the plans by NYSE Euronext have drawn criticism from some within the industry. Rules in the European Union’s original MiFID document of 2007 require that brokers seek the best possible execution for their clients, something which NYSE Euronext’s RMF may fail to provide.

“It could offer better prices, but it is not the best prices,” Peter Randall, chief executive of Equiduct Systems, a rival European share trading facility aimed at retail investors, told Markets Media.

“Better is not the best. The only way you can get the best price is to include prices of every platform in Europe and NYSE Euronext is not doing that [with the RMF].”

NYSE Euronext, though, admits that its RMF will not actually be offering true best execution.

“At no time we can say we are offering best execution,” said Suminski at NYSE Euronext. “Our system is very different from the one Equiduct has, for example. Their system calculates what the best price is by pulling in data from the different exchanges and MTFs in Europe and calculates a price once an order is entered into the system.

“So the system has to know what the incoming volume is to calculate the price. All of that takes time and creates latencies so there is no actual guarantee that the price will still be the best by the time you have pulled in that data. So had we done the same, we would have faced those same issues.

“We thought that in view of the fact that we had a very liquid order book and the competitive forces that are in play in an order book would deliver with more certainty a better price or price improvement.”

While Randall at Equiduct says that the move by NYSE Euronext will also bring added complications to the market.

“NYSE Euronext’s plans will just cause more market fragmentation,” he said. “And by doing this, NYSE Euronext will confuse everybody’s smart order router because you will see a price but you will have to discard it because it is not an accessible price. That won’t make them popular at all.

“They’ve lost out market share to Equiduct and I don’t think anybody feels that this is the golden bullet that will allow them to regain that.”

There were other dissenting voices in the market regarding the NYSE Euronext move.

Kee-Meng Tan, managing director and head of Knight Capital’s trading group in Europe

Kee-Meng Tan, managing director and head of Knight Capital’s trading group in Europe

“[NYSE Euronext] has seen some of its retail market share eroded and is trying to fight back,” Kee-Meng Tan, managing director and head of agency broker Knight Capital’s trading group in Europe, told Markets Media.

“In my opinion, I don’t think it is well conceived in its present form, after having been significantly altered to meet regulatory requirements. I don’t see how the model is facilitating best execution to the retail investor; perhaps better, but certainly not best. Price improvement is pretty meaningless if it is based on an uncompetitive benchmark, and is not always available.”

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