Exchanges Vie With Ultrafast Traders for Mom-and-Pop Stock Orders

Exchanges are challenging high-speed traders in the battle for mom-and-pop investors’ stock orders, looking to gain market share in the fiercely competitive business of U.S. equities trading.

Two exchanges have moved this year to introduce new features aimed at winning a greater share of individual investors’ trades. Exchanges covet that business because their other customers—such as hedge funds and asset managers—tend to get better prices when trading with individuals.

Retail trades account for about 15% of U.S. equities volume, according to research firm Tabb Group. Most orders from individual investors are handled by electronic-trading giants such as Citadel Securities and

Virtu Financial

which cut deals with online brokerages to execute their customers’ trades.

Cboe Global Markets

CBOE 2.23%

the third-biggest U.S. stock-exchange group, wants to change the rules on its EDGX marketplace to execute retail orders before similar orders from institutional investors—a proposal that has upset some big traders. If approved by the Securities and Exchange Commission, the plan could take effect as soon as October, Cboe says. Meanwhile, IEX Group Inc., the upstart exchange featured in Michael Lewis’s book “Flash Boys: A Wall Street Revolt,” plans to launch a program on Oct. 1 to attract retail orders. IEX is offering brokers a way to execute small investors’ trades at the “midpoint”—halfway between a stock’s buying and selling price. Today, midpoint executions are generally only available to banks and big investors. Both exchanges need new business. Cboe’s market share has fallen to about 17% since early 2017, when it entered equities trading by acquiring Bats Global Markets. IEX handles 3% of U.S. stock trades. Financial institutions and other big traders like dealing with small investors because, as a rule, they aren’t well-informed about market moves, and individually, they are too small to move prices. For instance, a hedge fund looking to unload 10,000 shares of


would likely get a better result by selling to 100 individuals than to a large pension fund. The pension fund might be purchasing a million shares of Apple, lifting the stock with its buying spree and causing the hedge fund to miss out on the move. “The market really likes to interact with retail,” said Robert Battalio, a finance professor at the University of Notre Dame.

But the majority of small investors’ market orders, which seek to buy or sell at a stock’s current price, never go to an exchange. Instead, high-speed traders pay brokerages to execute such orders, a legal but controversial arrangement that has long raised questions over whether small investors are being exploited. Firms like Citadel Securities, brokerages and a number of academics have said the practice benefits retail customers because their trades get executed at slightly better prices than what is available on exchanges. Exchanges have pursued more retail business, with little luck. The New York Stock Exchange introduced a program in 2012 to attract individuals’ market orders. The program accounts for less than one-half of 1% of NYSE’s trading volume, the exchange said in a filing last year. That leaves exchanges fighting over a small slice of individuals’ trades, particularly limit orders. In such orders, investors specify a maximum price at which they are willing to buy, or a minimum price at which they are willing to sell. Cboe’s EDGX has long been a major destination for such orders. Analysts say that is because it pays brokers rebates to send them there. A 2014 paper co-written by Prof. Battalio found that

TD Ameritrade Holding

AMTD 0.26%


E*Trade Financial

and Fidelity Investments sent more limit orders to EDGX than to any other trading venue, at a time when EDGX offered the highest rebate of any exchange.  “We regularly evaluate current execution quality,” TD Ameritrade said. Fidelity said it “works hard to get our customers a better price on their orders.” E*Trade didn’t respond to requests for comment.

The three brokerages have reduced their routing of limit orders to EDGX since 2014, regulatory filings show, contributing to the slump in Cboe’s market share. This year, Cboe raised the rebate it pays for some retail orders at EDGX and unveiled its “Retail Priority” proposal. If approved by the SEC, the exchange would execute individual investors’ orders before similar orders from anyone else—effectively letting them jump the queue while other customers wait. That has angered firms like AJO Partners, an institutional investment manager that oversees $19 billion in assets.

SHARE YOUR THOUGHTS As a retail investor, how do you feel about stock exchanges and high-speed traders competing for the right to execute your stock trades? Join the conversation below.

“We think it’s just blatantly discriminatory,” said AJO trader Sean Paylor. He argued that Cboe’s plan would hurt institutional investors because algorithmic traders would be able to see which orders on EDGX are coming from individuals, so by process of elimination, it would be clear when large firms like AJO are buying or selling. Cboe said investors are free to avoid EDGX. “No market participant is required to use Retail Priority, nor are market participants forced to post an order on any single exchange,” said

Bryan Harkins,

an executive vice president at Cboe. “Market participants will go to the exchange that suits their needs.” To receive our Markets newsletter every morning in your inbox, click here. Write to Alexander Osipovich at

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