The US is used to retail trading forming a sizable share of overall equity volumes but this is not the case in Europe, and market participants are hoping this will change. London Stock Exchange Group has launched a trading service for retail trading and the European Commission has unveiled reform of the legislative framework for retail investment.

In April this year LSEG announced the launch of Turquoise Retail Max, which is available through Turquoise Europe, the pan-European trading platform majority owned by the exchange and the  user community.

Adam Wood, chief executive of Turquoise Global and head of equities trading commercial proposition at LSE plc, told Markets Media that there are a couple of offerings for retail investors in Europe but the exchange felt they were predominantly led by market makers and are not really about providing the best price. He continued that Turquoise Retail Max allows retail brokers to achieve execution at primary market midpoint in a fully pre-trade transparent order book for the first time.

Outside the most liquid securities, where spreads are wider, price improvement does not have to be at the midpoint. Wood said it could be half a dozen ticks inside the best bid or offer which is still a positive outcome.

“We felt that best execution and showing price improvement was the best way to serve retail brokers,” he added.

In addition to supporting retail brokers, another reason for launching the service is that institutional customers want to interact with retail, especially as orders from retail brokers are larger than average at between €4,000 and €7,000 according to Wood.

Turquoise Retail Max enables retail brokers to meet their best execution obligations on pan-European securities through a competitive multilateral auction process. Turquoise Europe covers more than 2,400 securities, including depository receipts, ETP and rights issues (excluding UK and Swiss securities) across 17 European countries. There is a lot of focus on France, Italy, and the Nordics which have very active home markets.”

Wood said: “We wanted to create a multilateral offering that works with market makers who play a huge role in ensuring there is liquidity for retail brokers trading a diverse range of securities.”

Orders with a retail flag can achieve best execution by utilising liquidity provided by both specialist retail liquidity providers and all other market participants. Once an auction is triggered, all members can participate so whoever provides the best price wins and the retail order gains price improvement.

Turquoise has been working with market makers and brokers to understand the securities that are harder to trade, including ETFs, which Wood said are notoriously difficult to price on exchange.

“This is a great solution because market makers can only interact with retail orders and so they can price competitively,” Wood added. “The flag also allows us to monitor the flow, perform surveillance and  tariff those models differently.”

Wood added that one of their biggest needs of retail brokers is geographical expansion as investors are moving away from trading just in their home market to other European markets. In addition, US or Asian retail brokers trading into Europe could use this service.

Hudson River Trading and Stifel are the first retail liquidity providers to use Turquoise Retail Max.

Paul Makepeace, head of trading at Stifel Europe, said in a statement: “We see Turquoise Plato Lit Auctions Order Book as a novel way to enable specialised liquidity to interact with retail orders in a multilateral order book. We believe that joining Turquoise Retail Max as a retail liquidity provider is an opportunity to enhance Stifel’s execution value proposition in Europe.

Growth

Wood explained there was a big increase in retail trading during the pandemic lockdowns, and although that growth has slowed, retail volumes are still significantly bigger than five years ago. He expects growth to continue as the younger generation has started to trade.

“They may have begun in crypto but that generally leads them to ETFs and equities and they want to look after their own investments, especially as pensions are being challenged,” he added.

Governments are also providing tax incentives to retail investors. For example, some of the numbers on German accounts being opened are quite high according to Wood.

The European Commission also wants to increase retail investment in the region and in May this year unveiled reforms of the EU legislative framework – the  Retail Investment Strategy.

The European Fund and Asset Management Association said in a statement that representative bodies of the European financial and insurance sector strongly support the objective of boosting retail participation in financial markets, but many proposals are far-reaching and raise multiple concerns.

EFAMA said: “There are many prohibitions to the payment of commissions in the RIS proposals, and these would have major disruptive consequences for the European financial sector and consumers’ access to investment and insurance protection.”

The trade bodies also held substantial reservations on the new “best interest of the client” test which they said may lead clients to prioritise the “cheapest” product over others that could potentially offer them greater value; the significant number of new processes, policies, organisational requirements, technical disclosures and compliance obligations and the proposed introduction of one-size-fits-all, quantitative “value for money” benchmarks.

“We are equally concerned about the unfeasible timeline for the implementation of the new requirements,” said EFAMA. “At present, the transposition dates proposed in the current draft would make it impossible for the industry to comply, as it can already be predicted that by then not even the Level 2 specifications will have been published.”