How Retail Priority Benefits End Investors
Cboe’s EDGX Retail Priority enhances execution quality and trading outcomes for individual investors by reducing the time to execution. Retail Priority offers eligible retail-attested orders a unique allocation model that is different than the traditional time-based allocation model used by most U.S. equities exchanges. With Retail Priority, attested retail investors’ displayed limit orders post at the front of the order queue for the same-priced orders submitted by institutions on Cboe EDGX. In the analysis below, Cboe’s Execution Consulting Team studies the impact Retail Priority has on attested retail orders and examines how the mechanism benefits investors.
Changes in Retail Trading
Retail trading has risen steadily since the start of the COVID-19 pandemic, which corresponds with the significant increase in retail volume on Cboe EDGX, primarily driven by the growth of Retail Priority. Retail Priority reached an all-time high of 417.9 million shares traded per day in first-quarter 2021, driven by trading in popular meme stocks such as GameStop and AMC during the height of the meme stock trading phenomenon.
Although retail trading has decreased since its first-quarter 2021 peak, retail participation remains elevated from pre-pandemic levels. For instance, in first-quarter 2022, EDGX Retail Priority orders traded an average of 214.4 million shares per day, a decrease of 49% from the 2021 peak but an increase compared to first-quarter 2020.
Retail Priority has changed the make-up of Cboe EDGX by attracting more non-marketable retail trading flow. Since 2020, retail attested volume has, on average, comprised around 25% of EDGX’s overall volume. During the peak of the meme stock phenomenon in first-quarter 2021, EDGX’s book was over 28% retail-attested volume, of which 18% was executed with Retail Priority. A year later, this volume has decreased, with 21% of EDGX volume retail-attested.
The figure below highlights EDGX volume by hour in first-quarter 2022 to examine how the flow dynamic changes throughout the day. Retail activity is a higher percentage of EDGX volume during the pre-market and after-hours trading sessions than during the continuous session. On average, during the pre-market session retail trading makes up about 44% of EDGX’s volume, of which 35% is represented by Retail Priority. This number significantly decreases to about 25% during the continuous session. Overall retail participation on EDGX is the lowest around 3 p.m. Eastern Time, which is when traditional institutional investor trading volume typically increases going into the close. The most retail participation on EDGX occurs during the after-hours trading session, when 48% of volume is retail-attested. 23% of that volume is from Retail Priority orders and 25% is other retail-attested volume.
Retail Trade Size
We also studied average trade size for the different order flow types on Cboe’s EDGX exchange. The average trade size across all order flow types has decreased since first-quarter 2020, as stock valuations increased. Retail Priority and other retail-attested volume followed a similar trend. Additionally, the average trade size for Retail Priority orders is slightly lower than other retail orders. However, on average, non-retail attested volume trade size is about 44% less than retail orders.
Interestingly, Retail Priority volume has a larger average notional value than other retail attested and non-retail attested volume. Retail Priority has a 40% larger notional trade size than other retail attested volume, on average. Since second-quarter 2020, Retail Priority’s average notional size has steadily increased to over $9,000, while non-retail average notional size has decreased since third-quarter 2021 and is currently at $5,000.
Retail Priority Metrics
The amount of time it takes for a Retail Priority order to first get filled and the turnover rate of the order, or the number of shares executed per second, is also worth noting. The EDGX Retail Priority mechanism is designed for attested retail priority orders to receive queue priority, compared to other orders. The chart below shows time to first-fill in seconds and turnover by the different order flow types on EDGX.
In first-quarter 2020, Retail Priority orders reached first-fill 10% faster than other non-retail priority orders, or 8.9 seconds in Retail Priority compared to 9.9 seconds for other retail orders. Time to first-fill decreased significantly in all retail orders since first-quarter 2020 as more retail volume traded on EDGX. Since 2020, time to first-fill in Retail Priority orders was, on average, 25% faster than other retail orders.
In terms of turnover rate, the number of shares executed per second for Retail Priority increased over 750% since first-quarter 2020, from 177 shares per second to 1,509 shares per second. On average since 2020, Retail Priority orders had a 36% higher turnover than other retail orders.
Roadblocks to Greater Retail Participation
Based on the data, EDGX’s Retail Priority program only benefits non-marketable retail orders, which represent a small percentage of retail orders in the market. The ability of marketable retail orders to trade directly on-exchange is constrained by several factors, including the application of Securities and Exchange Commission Rule 15c3-5, the Market Access Rule (MAR), to retail customers. Overall, this rule has been beneficial to the markets because it has deterred retail brokers from sending held customer orders with aggressive limit prices directly to exchanges, even if the order would execute fully within the spread. However, Cboe believes a conversation with the SEC about potential enhancements to the MAR for retail trading customers would allow exchanges and other market participants to direct marketable retail orders to the public exchanges, ultimately benefiting end investors.
Cboe Retail Priority provides meaningful improvement in execution quality, best execution and trading outcomes for individual investors, as shown by the evidence above. As retail interest in the markets has grown since the start of the COVID-19 pandemic, EDGX’s Retail Priority has continued to gain interest from retail trading participants. Retail Priority is a proven method to reduce the time-to-execution for retail orders and provide significant benefits to individual investors, who may otherwise struggle to compete with institutional investors.
In addition to Retail Priority, Cboe offers a Retail Membership Program on EDGX. The program provides members that meet the eligibility requirements with discounted firm membership fees, logical and physical port fees and market data fees. Additionally, the Retail Membership Program gives investors the opportunity to participate in enhanced transaction pricing programs for retail orders.
Please reach out to our coverage team with questions and to learn how we can help you optimize your trading experience.