The Rise of Retail Trading - The European Perspective

The full picture of on-exchange retail trading

By Nazed Mannan, Senior Product Manager, BMLL

First published in TabbFORUM, 3 December, 2024

Following our previous article on retail trading where we examined the US markets, we now look at the European retail trading landscape, using Level 3 order book data to build a fuller picture of retail trading activity.

In contrast to the US, Europe has a less consistent and more fragmented approach when it comes to retail markets. Firstly, many countries (with the exception of Germany) do not have payment for order flow (PFOF), and incoming regulatory changes are looking to ban the practice altogether. Secondly, the mechanisms and ways that retail brokers trade varies country to country. For example, UK stocks trade on the RSP network, a Request for Quote driven environment. In contrast, pan-European players like Euronext and Equiduct provide retail improvement mechanisms (Best of Book and Apex respectively) whereby retail investors can trade inside best quoted prices - similar to US retail improvement programs, whilst Germany is driven by PFOF venues such as Tradegate.

Importantly, exchanges and venues are increasingly looking to drive and attract retail volumes - Deutsche Boerse recently launched a flag on Xetra that made it possible to directly identify trades that received price improvement via the Xetra Retail Service, and CBOE Europe has launched a new tariff program for retail brokers. Understanding how retail volumes change and behave on these mechanisms is therefore essential for anyone wanting to efficiently execute within Europe.

Historically, there has been limited analysis of retail trading in Europe (as opposed to the US). Here, we leverage Level 3 historical data and messages in order to identify and analyse European retail trading market microstructure.

US vs European Retail Trading - contrasting mechanisms

We start by looking at retail trading mechanisms across European countries. This dataset includes trades (identified directly with flags or indirectly with heuristic measures) from Euronext Best of Book, SIX EBBO, the RSP (Retail Service Provider) network on the London Stock Exchange, BME, Xetra and Equiduct Apex. Retail flows can take multiple channels within venues to execute, therefore it is important to note whilst providing valuable transparency, retail trade flags may not in all cases capture the entirety of retail volume on a venue.

• The scale of the entire US market is 5x that of the European market, with 118 and 22 trillion traded YTD respectively. In contrast, from Fig.1, the US retail market is almost 20x that of the European market (across all listed equities and ETPs), with US retail investors trading up to 240 bn USD monthly in 2024 and EU retail investors trading 12-14 bn USD comparatively. Fig 2 further breaks down EU retail volume by MIC.

• Among the largest-cap European stocks represented by the CBOE All-Europe Companies (BEPACP) index, a few notable names display the highest retail market share by notional traded - ASML Holding, Louis Vuitton - Moet Hennessy, Banco Bilbao Vizcaya Argentaria, Total Energies SE & BNP Paribas SA. Fig 3 displays the total retail notional traded on a monthly basis and Fig 4 singles out the retail volume traded in the Top Ten instruments.

Retail activity by day of week

It is also interesting to see the differences between the average level of retail activity in different markets, based on the day of the week. In Fig 5 below, we look at the mean EUR notional traded in UK and French stocks between January and August 2024, French retail volumes tend to be higher on Thursday and Friday, whereas UK activity is higher on Monday, at the start of the week. Such patterns in behaviour may suggest cultural differences that influence retail trading across markets.

How do we interact better with retail flow?

Retail trading continues to grow globally, along with institutional interest in understanding its unique liquidity characteristics and unconventional drivers. Trading practitioners need a detailed and granular breakdown of the overall retail market to target and interact with this segment. They need to manage their trading strategies and risk as adoption grows to achieve the best possible outcomes. High quality Level 3 historical exchange data, a deep suite of trading analytics and the right research tools are necessary to respond to changing global market structure and provide transparency upon this liquidity segment.

The BMLL Retail Trades dataset provides daily retail trading volumes on a per-instrument basis across multiple mechanisms and regions. The dataset combines Level 3 flags and heuristic models, enabling users to quickly and easily understand the evolution of retail trading volumes across European markets.