Retail-friendly crossing engines bid for success in Europe

Importing into Europe established US crossing engine models that mix retail and institutional flow may prove a challenge, but two operators of such systems – Knight Capital and Citi – believe they can rise to it.
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Importing into Europe established US crossing engine models that mix retail and institutional flow may prove a challenge, but two operators of such systems – Knight Capital and Citi – believe they can rise to it.

Knight Capital Europe, the European division of US-based broker Knight, has today launched a version of the firm’s Knight Link off-exchange trading service which allows orders from European institutional and retail brokers to interact with Knight’s internal market-making flow. The European Knight Link is registered as a systematic internaliser under MiFID with the UK Financial Services Authority, and the broker has been registered as a retail service provider

in the UK since June. The platform reports pre-trade quotes to pan-European trade reporting venue Markit BOAT.

Unlike a typical broker-owned crossing engine or independent dark pool, where orders are matched against each other, Knight executes all orders in Knight Link against its own internal book.

Knight aims to attract European retail flow by enabling retail brokers to benefit

from the recent proliferation of trading venues in the region. The broker will soon start offering market-making services on pan-European trading platform Equiduct’s PartnerEx facility. This will allow Knight to execute retail trades bilaterally at Equiduct’s volume-weighted best bid and offer (VBBO), a proxy for the best price offered across all European trading venues.

“We believe there is room for improvement in retail execution quality, both in the UK and continental Europe,” Kee-Meng Tan, managing director of Knight Link in Europe, told “On the continent, for example, most retail orders get executed on the primary exchange and these days, with significant fragmentation, that means missing out on 25-30% of the flow.”

The platform also offers benefits to institutional market participants, according to Tan. Institutional orders are executed off-exchange and cleared bilaterally, avoiding execution and clearing costs associated with on-exchange trading. “If you go to Knight Link rather than a primary exchange, we can often give you a fill a lot faster than it could,” he adds.

Moreover, Knight Link allows institutional orders to interact with retail flow, which many institutional investors find attractive because retail investors typically respond to specific events or news flow rather than a longer term, ‘buy-and-hold’ approach. The US version of Knight Link traded an average 129 million shares a day in October.

However, directly importing retail-driven pools to Europe is no easy task. Citi launched the European version of its Citi Match internalisation engine in April. Citi Match has its origins in I-Match, a retail-driven crossing network operated by US market-making firm Automated Trading Desk, which Citi bought in 2007.

However, the European version of Citi Match has not yet achieved the same volume of retail flow as its US counterpart, according to Jack Vensel, head of Citi’s EMEA electronic execution division, in part because of differences in the regions’ high-street broking markets.

“The retail online broker-dealer community in Europe is not as developed as it is in the US, where brokers focus on marketing and account management but are less interested in internalisation of orders,” said Vensel. “There are very good retail firms in Europe, but many of them are still focused on doing the internalisation themselves.”

While European retail brokers internalise flow themselves, i.e. by crossing client orders against each other before executing on the primary, they will sometimes want to send orders to a broker pool to avoid crossing the spread on exchange, said Vensel. In these cases, they are invited to send an immediate-or-cancel order to Citi Match.

While he acknowledges that the retail landscape is different in Europe, Vensel believes Citi Match in Europe can match the success of its US counterpart.

“The proportion of retail to other order flow might not be the same in Citi Match in Europe as in the US, but it is certainly a goal to replicate that business model in Europe,” he said. “The more diverse the order flow you can bring together, the better it is for your institutional clients as they are more likely to find a match. We are going to continue to look for other ways to work with the retail broker-dealers.”

He added that Citi Match’s average crossing rate in the third quarter was around 17%, with an average spread capture of approximately 68%.

Tan at Knight Link points out that many retail brokers in Europe are still content to trade on primary exchanges, and, as there is no order protection rule in Europe, they are missing out on the best prices. Rule 611 of Regulation NMS requires US trading platforms to route orders to the venue with the best price.

However, he feels the retail market is becoming more aware of the situation. “Retail brokers can’t continue to execute at primary prices for all eternity because there are better prices elsewhere and they aren’t doing their clients any favours by staying with the primary,” he says. “People are starting to react to that and we have got a number of clients already committed to coming onto the Equiduct platform with us as a market maker.”