Retail boost is driving volumes off-exchange, Liquidnet finds

In its mid-year review, Liquidnet’s Jeff O’Connor, head of equities market structure America, explores continued growth in the retail market and the impact it is having on where volumes are executed.

The first half of this year has seen a high level of off-exchange volumes off the back of increased retail participation, a Liquidnet mid-year review has found, with the first six months of 2023 sustaining 43% of total market volume off-exchange.

Retail traders typically follow equity performance closely – a trend dating back to 2021. According to Liquidnet’s review, pressure put on equities throughout the course of this year has presented retail traders with a number of “valleys” that offer large percentage gains on specific stocks. And this has subsequently seen volumes move off-exchange.

Despite retail flows not necessarily adding much in terms of available liquidity, Liquidnet noted that book depth, lower correlations and reduced volatility had improved for traders and portfolio managers.

Last week, JP Morgan cited the biggest retail flows on record, with non-professional investors buying $1.5 billion of single stocks, including ETFs, with a total of $4.4 billion worth of purchasing.

Elsewhere, Liquidnet noted the role payment for order flow (PFOF) structures are playing in pushing volumes off-exchange.

Wholesales were found to have increased their consumption of flow from retail brokers. Volume is consumed into the wholesaler risk book, translating into volume which is typically unable to be seen by the institutional community – or until that position is already exhausted out.

Last week, the European Council and Parliament introduced a “general ban” on PFOF, with temporary exemptions for member states where firms currently use the practice until June 2026. The decision to impose a ban on PFOF follows lengthy debate, which has proved to be the most divisive during Trilogue discussions, with the European Council and Parliament initially having opposing views on how to approach it.