Neobrokers predominantly trading ETFs on smaller venues could be leading to wider spreads, according to a survey by the European Securities and Markets Authority (ESMA).
The survey – capturing 2023 data from 10 million EU neobroker accounts – found digital platforms execute most client orders on smaller trading venues, potentially fragmenting order flow into markets dominated by retail traders.
The regulator defined smaller venues as “not the largest or most liquid markets” for the particular ETF, versus main venues, the ETF or share’s national market.
ESMA said the fragmentation could influence market makers’ spreads, as they consider the ratio of informed traders to ‘noise’ traders, uninformed traders or those trading for hedging purposes.
“Research suggests that such fragmentation could affect the spreads applied by market makers, based on their assessment of the ratio of informed traders to ‘noise’ traders,” ESMA said.
However, it added prices on smaller venues are usually based on main market prices. Therefore, the overall impact of neobroker order flow on spreads in smaller trading venues is likely minimal.
The survey also found that ETFs – alongside shares – are the most commonly offered products on neobroker’s platforms.
ETFs recorded highest relative growth of trading volumes between 2019 and 2022, rising 550% during the period.
The growth of retail execution platform innovation has been tipped as one of the catalysts of driving more flows onto exchange.
On exchange liquidity has long been touted as a major issue for a fragmented European ETF ecosystem, currently dominated by request-for-quote.
The planned ban on payment for order flow and high trading fees has been touted as major challenges for retail trading of ETFs to overcome.
Neobroker’s offering ETFs have continued to gain traction across Europe this year, most recently with Trade Republic and justTRADE offering Franklin Templeton’s entire ETF suite on both neobroker’s German and Austrian platforms.