London-based corporate and institutional brokerage Oriel Securities has developed a new tool that allows institutional investors to interact with aggregated retail liquidity.
“Our new offering allows institutions to trade against retail flow on an off-exchange basis, thereby minimising the chance of market impact, and totally free of high-frequency trading and other types of flow the buy-side are trying to avoid,” Joe Everitt, head of the retail service provider team at Oriel Securities, told theTRADEnews.com.
Oriel's new institutional solution allows the buy-side to send in passive child orders directly from their execution management systems and execute against retail orders as they come into Oriel, on an aggregated basis. The firm is currently in discussions to sign up its first clients to the system.
Using the platform, institutions trade on an over-the-counter basis in the knowledge that it is practically impossible for flow to be derived from high-frequency firms or prop trading desks.
The tool was developed in conjunction with financial technology provider NETbuilder and primarily covers FTSE 100 and FTSE 250 stocks, but can be used for all UK stocks.
“Retail flow accounts for around 11% of trading on the London Stock Exchange, and these types of orders cumulatively represent a significant source of liquidity for institutions,” said Everitt, whose team at Oriel was formed from the former retail service provider (RSP) desk at Dresdner Kieinwort. “However, retail liquidity is typically expensive to source for institutions because they are small in size and incur high clearing and settlement costs.”
Under the RSP model, retail brokers use electronic platforms to request quotes from the market makers they are connected to, such as Oriel, Winterflood, Knight Capital and Citadel Execution Services. The broker then selects the best market maker quote on offer and proceeds to fill its order. According to Everitt, Oriel offers around 50,000 quotes to retail brokers on a daily basis, of which 2–3,000 are traded against.
Although traditionally separate, UK retail and institutional equity order flow are increasingly intertwined, notably through services developed by US firms looking to replicate domestic success in Europe. Chicago-headquartered Citadel Execution Services offers both retail and institutional services in the UK, while New Jersey-based Knight Capital has operated in the UK as an RSP since 2009. Its services include Knight Link, a crossing network that mixes both retail and institutional trading flow. Citadel and Knight Capital are also shareholders and liquidity providers for Equiduct, a regulated market that targets retail brokers, which has recently built liquidity in French blue-chips stocks.