MMs24 Nov 2020 18:18
His post uses as its examples trades placed on the order books in 1999, and the named malpractices are variants of market maker collusion to move prices in their favour and against investors.
Regulation has moved on a long way since then, on both sides of the Atlantic. In any case, due to its size and unrivalled culture of retail equity investing, the routing of orders in America has important differences to the UK market.
Regulatory focus on best outcomes for investors
Buying shares online via a UK execution-only stockbroker in 2018 is very different to placing orders in America 20 years ago; aside from 21st century technological advances, the regulatory environment is as different as night and day. At the beginning of 2018, Mifid II (the new markets in financial instruments directive) was implemented in the UK. This monumental piece of legislation from the European Securities and Markets Authority (ESMA) places transparency at its heart and there is an onus on brokers and market makers to deliver best client outcomes in deal execution. This means that, unlike in the US, it is illegal for market makers to incentivise buy-side brokers with commission for order flow.
In the US, where there are a plethora of market makers and several regional exchanges, paying for order flow is common practice. In the UK, however, the onus is on market makers to seek out liquidity to fill trades. Healthy competition on the London Stock Exchange (LSE) works to narrow spreads, and the requirements placed on retail stockbrokers by Regulatory Technical Standards 28 (RTS 28) to list their top five trading destinations is designed to maintain a focus on getting the best deal for clients.
Yet there are still instances, especially investing further down the market capitalisation scale, where retail investors feel aggrieved that prices are moving against them, unfairly they say, although the market makers themselves insist retail is treated no differently to any other source of order flow. Shore Capital (ShoreCap) is the third-largest market maker on the Alternative Investment Market (Aim) by volume of trades, and says that its focus is on gathering liquidity whatever its source. Retail flow is important for Aim, so it is not in anyone’s interest to treat it differently to trades placed by institutions – a healthy and well-functioning market relies on the whole liquidity universe that all investors benefit from.
The problems faced by retail investors are generic in the small-cap space. As Simon Fine, co-chief executive, and Nick Conyerd, head of marketing, at ShoreCap explain, the difficulty with some Aim stocks is that, thanks to the positions of a few large institutions who are viewing interesting companies as a long-term investment, the real free float of stock available in some companies can be quite small.
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