Retail Spreads
After looking at retail trade sizes last week, let's have a look at spreads.
The retail trading landscape in Germany is weird. Payment for order flow (PFOF) is still a thing (at least until 2026); most of the retail volume is traded on single-market-maker venues. NB: A recent discussion paper by the German Bundesbank gives a nice overview of the retail landscape in Germany and the profitability of retail market makers.
Fig. 1 below shows the intraday volume profiles for three of those retail venues and also of identifiable retail orders on Xetra (see methodology in last week's post). During the regular trading hours (09:00 - 17:30 CET), all venues look very similar: a lot of activity after the open followed by a slump midday and a final bump in the late afternoon. The chart is based only on one week of data, hence the noise.
The retail venues also offer off-hour trading. And we do see a low level of activity pre-open and post-close (of the primary).
But the main topic of the post is the pricing on these venues. I compute the average spread in bps in 1-min bins for each venue. For Xetra I incorporate (the invisible in EOBI data) RLP orders which can narrow the spread compared to the "normal" spread. Retail orders can benefit from price improvement vs. the lit book. NB: The "retail book" is disseminated in a separate real-time feed. In short: For Xetra, the "retail spread" is the better price between the "normal" BBO and any RLP orders.
Fig. 2 shows the average spread over a random day. Green denotes periods of continuous trading on the primary, yellow are scheduled auctions (opening: 08:50-09:00, intraday: 13:00-13:02, closing: 17:30-17:35; plus a random 30 s period for each auction), and red represents off-hour trading.
Xetra, obviously, only shows data during continuous trading phases. But even during this time, the average spread on Xetra is consistently at least as tight as on the other venues. Only Tradegate seems to match Xetra's spread. LSX and gettex are significantly wider.
In the off-hours, spreads widen by a lot. I wonder if this is solely because of pricing uncertainty due to lack of price formation on the primary. Still, given that DAX future data is available during these times, spreads of >30 bps seem pretty conservative. I also wonder if retail traders active during the off-hours are aware of this.
PS: The are some visible minor data issues. Retrieving the legally required pre-trade transparency data is a bit of a PITA (probably intentionally). Data is not available historically, but only for the previous 24h. Data is in files each only containing 1-min or 5-min intervals. This means that data for a single day is spread over dozens or hundreds of files. But at least one venue blocks programmatic downloads without some trickery.
Capital Markets Execution Consultant for Public Companies | Share Buy-backs | Group Exco | Global Head Execution Services | Algorithmic and Program Trading | Governance | Risk Managment | SM&CR Significant Person
3 周Interesting that Tradegate's pricing widens so much during the intraday auction phase - seems to make little sense, as the risk of carrying any new position should be much lower than in the off hours phase, yet their pricing does not reflect it.
Founder, Proprietary Trader
1 个月Stefan Schlamp interesting, as always. Thank you. The spread is so large because there is basically no competition within the single venues. There is only competition among the venues. The rules of these venues prevent any competition by having special rules like very low OTR ratios (i.e. 5!! at Tradegate), which maked it impossible to quote continously, or rules about partial fills where your large passive order gets NO fill on low size incoming orders even if your order is best price.
ETF & Credit Specialist at Tradeweb | ETF Market Structure | Institutional Trading | RFQ, Algo & Electronic Trading
1 个月But hey it’s ‘free’. Isn’t that the most important to the German retail investor? ??