Retail orders, by construction, are small and uninformed. Unlike institutional or professional traders, retail investors are considered uninformed for a variety of reasons – lack of access to market moving information, inadequate technology and quantitative analysis resources to get directional insight into the immediate market move, etc. Readers may assume I am talking about US equities.

The uninformed nature of retail orders makes them valuable to many market participants, including market makers. The construction of retail orders tells us that the true value of a marketable retail order lies between the best national bid and offer displayed on exchanges. For example, a marketable buy retail order should normally execute at a price lower than the best national displayed offer.

But how can the true value of an uninformed retail order be discovered?

Can exchanges, in the current market structure, discover the true value of a retail order? If exchanges were able to do that, they would have already captured a meaningful share of retail trading. The current regulatory environment provides the exchanges with flexibility to compete for retail orders. The exchanges can offer rebates to compete with Payment for Order Flow (PFOF) that market makers provide. These exchanges can also create a hidden order book to deliver Price Improvement (or PI, a term used to measure how much the execution price is better compared to the best quote displayed on the exchanges). In fact, over many recent years, exchanges have come up with offerings based on a combination of rebates and PI hidden orders, with little success. So why have exchanges not succeeded? That brings me to the fundamental reason, which we can call – “Guaranteed First Look of a Retail Order”.

The value of a retail order lies in it being uninformed. The value of being uninformed rapidly decreases, and the information content of an order increases, as the contra (say, market maker) falls behind in the queue of getting exposed to the retail order. The value is highest for the first look, especially if it comes with a guarantee.

With extreme exchange fragmentation in the US market, the guaranteed first look is nearly impossible. The dedicated hidden order book that exchanges create to interact with retail orders does not have the best value offer from liquidity providers because their models turn “conservative” to account for the uncertainty in queue position. Assume that regulators grant exchanges their wish and make it mandatory to execute all retail orders on public exchanges. Well, in my view, that venture will be funded by retail investors through evaporation of their order value. Retail investors would also end up subsidizing market quality for rest of the participants.

Let us now discuss the current predominant method of retail trade executions, which is direct delivery of retail orders to a few market makers. Earlier I emphasized that the true value of a marketable retail order lies somewhere in between the best bid and offer displayed on the exchanges. The industry practices have mostly chosen to break the compensation for that value into two pieces, PFOF and PI. The retail broker gets the PFOF, and the retail investor gets the PI.

To a large extent, PFOF and PI are predetermined arrangements between the retail broker and the market maker. That means, retail orders are handled at a bulk level through a non-real time arrangement. Retail brokers argue that PFOF helps invest in services for their clients and keeps upfront commission low (zero commission). This is mostly correct.

Involved parties further argue that a siloed and direct delivery of a retail order helps the market maker to deliver the best value. Essentially, the Guaranteed First Look of a Retail Order helps market makers help retail investors.

Retail brokers and predetermined market makers all have good intentions and make efforts to deliver value to retail investors. So, what is the problem with current order handling practices?

Well, good intentions and efforts of market participants are helpful, but for an efficient market and price discovery, there should be a free and fair competition. There should be competition for The Guaranteed First look of a Retail Order in real-time and on a per order basis.

To compete for retail orders, the market should be open for all market participants, not just a few predetermined market makers. Every participant should have the ability to offer PFOF and PI in real time, for each security. Retail brokers should have flexibility, based on their competitive strategy, whether they want PI or PFOF or any combination of the two. They should have the ability to specify their choices on a per order basis. The market should deliver the best deal to the retail order through real time “bidding” by competing participants and based on Retail broker choices.

RTX Technologies is building an integrated marketplace for retail orders. RTX platform is unconflicted and guided by free and fair competition for retail orders. The platform will allow all willing market makers, exchanges, and institutional broker dealers to compete for the Retail order.

The integrated platform will identify the best deal for a Retail order based on the Retail broker’s choices. Retail brokers will have the ability to express their choices through a simple system. Retail brokers may choose to get executions through the methods used for Institutional Order Handling, or any combination of PFOF and PI.

RTX is proposing an intuitive and innovative solution which delivers competition and transparency on behalf of Retail investors. Retail brokers will have execution capability which is aligned with their client interests and eliminates conflicts.

The RTX platform remedies extreme market power concentration on Retail orders execution front by melting the barriers for new entrants. The core methods and technologies are patent pending. RTX will soon conduct pre-production demo of its technology and integrated marketplace for select market participants.