Best Execution spoke with Adam Wood, CEO Turquoise Global & head of equities commercial proposition, and Alicia Suminski, business development senior manager execution services, at the London Stock Exchange about their latest Turquoise product launch.
What were the drivers behind the launch of Turquoise Retail Max™?
AW: We wanted to offer an effective solution improving order flow and best execution for European retail investors who are looking to achieve better outcomes. There have been several studies recently by European regulators on how retail investors should be better served. For example, a report by the French regulator AMF (Autorité des Marchés Financiers) said that around 75% of retail trading was dominated by one market maker on some of the main European exchanges. We believe that it is more efficient for retail investors to interact in a multi-lateral order book.
Is retail trading growing in Europe?
AW: While retail trading in Europe is not back to its peak, it is increasing. There are online brokers and apps available where retail investors can follow their portfolios in real time, but the industry needs to do more in terms of financial education, such as explaining the cost of execution and what it entails. In the past, people were more interested in a buy and hold approach, but today they are more acutely aware that they need to actively manage their savings. This is reflected in the change of products and geographical expansion we have seen in trading activity. For example, retail investors are expanding their trading from Europe to the US, as well as showing greater interest in products such as exchange traded funds.
How does Turquoise Retail Max™ help solve some of the issues?
AS: We started the initiative two years ago and engaged with brokers, market makers and other market participants to understand what the challenges were and how we could provide a better service. In our view, every order whether it be 1 or 1,000 shares should be given the best opportunity to participate in price formation. We chose to build the service on our Turquoise Plato Lit Auctions™ Order Book, because its unique price formation mechanism can yield price improvements. However, one of the problems we had is that retail brokers do not see resting liquidity there, due to the very nature of the order book, so we needed to shed a light on that order book, and on its liquidity, in order for brokers to target it. To do that we have created a Retail Liquidity Provider scheme and will make that liquidity visible.
We also wanted to break down the hurdles of technology. Retail brokers can access our platform directly or through one of our members which saves both time and cost in terms of building a smart order router to gain access to the brokers.
What does the product entail?
AS: We offer retail investors the ability to interact with retail liquidity providers as well as existing diverse market participants. A retail order will only trigger an auction if it creates a crossed order book. In other words, if it finds contra liquidity. Retail liquidity provider orders can only match with retail orders but retail orders can match with all orders. Retail brokers now have access to Level 1 Top of Book Turquoise Retail Liquidity Providers’ Best Bid / Best Offer prices and volumes.
We have also introduced an opt-in deferred cancellation feature for all participants, but particularly for the retail liquidity providers, to ensure an auction involving a retail order does not fail. Generally, the way this works is that when using this feature, market participants will not be able to inadvertently cancel an order when an auction is ongoing.
How does your service differentiate itself?
AW: The key for us is that Turquoise Retail Max™ is multi-lateral in nature. We are using a lit auction because it re-interrogates the market every time there is a possible match and all market participants are in competition, which means that retail investors are getting the best of both worlds. The auction process calls market participants to participate with their most competitive pricing and then it selects the price which maximises volume like a traditional auction but will always select the midpoint price or that nearest to midpoint if there is a choice of prices. This is a far better outcome than crossing the entirety of the spread to what may or may not be a stale price and therefore provides best execution.
We are also offering retail brokers the ability to include a dynamic price limit in their orders (primary market best bid, or offer) which guarantees an execution at a price no lower than the primary market best bid and offer prices.
Another advantage is that retail orders benefit from waived fees for execution and retail brokers can benefit from a fee waiver allowing real time redistribution of Pan European market data to their clients.
We designed Turquoise Retail Max™ in collaboration with our members and retail brokers to provide the first of the next generation of best execution services ultimately to help their European retail investor clients achieve price improvements.
