Execution venues fiercely compete for your retail order flow with some even offering commission-free execution. So, where does your order end up after you click submit on your phone?

As any good exchange will tell you, it takes two to tango, meaning you need to find a market maker that wants to execute with you. Luckily, liquidity providers love retail orders. On average, retail investors are less well informed compared to other wholesale traders and consequently are less likely to give lemons to market makers.

There are many places your order could go and, each venue might match you with a different market maker. You could end up with retail focused exchanges such as Equiduct (APEX), or Request for Execution models offered by Vorvel. Alternatively, you could execute at a Systematic Internaliser operated by the electronic market maker itself or you could end up with one of many Retail Service Providers (RSP) operating in the UK.

In the last two years, traditional markets have started asking members to flag retail orders in order to offer benefits or incentives. This begins with identifying retail orders in market data feeds, allowing sophisticated market makers to pick them up (e.g. MEFF) Essentially a form of virtue signalling, this approach is interesting for retail orders willing to rest passively in the open order book.

Next, other exchanges offer rebate fees for retail orders. This approach is similar to dating websites: first attract retail orders with low fees and then charge market makers the full price (e.g. CBOE).

Finally, some exchanges (Euronext Best of Books, XETRA Retail Execution Service) introduce special quotes that only execute against retail orders. This technically complex method allows price improvements exclusive for retail orders while still matching in the order book. For market makers, this model is attractive as they avoid executing against competitors.

Whether retailers will weigh up all these options is doubtful. However, retail brokers certainly will, ensuring that their customers will have the full benefit. Ultimately, you as retailer shouldn’t forget that you are the guest of honour that everyone wants to dance with.