For several years, we have noticed that individual investors often wonder about the fact that institutional traders would benefit from preferential conditions for placing orders on the stock market, whereas, on the contrary, individual traders would not have access to them.
In reality, the European financial regulation (MiFID II), whose objective is to protect investors and ensure the proper functioning of financial markets, imposes especially favorable conditions for individual investors, and this at different levels.
In this article, we explain what the Euronext Best of Book service is – literally “the best of the book” – thanks to which retail investors can benefit from the best conditions when placing buy/sell orders on the stock exchange.
Explanation of the principle of “Best Execution” on the Stock Exchange
Let’s start with a reminder of the law
Since the adoption of the MiFID II directive by the European Commission in 2014, which aims to guarantee greater transparency on the financial markets thanks to harmonized regulations at European level, financial intermediaries (ie brokers) are obliged to execute purchase/sale orders for securities initiated by individual investors in compliance with the best execution policy.
The best execution policy provides that a stockbroker must make every effort to ensure that orders will be executed at the most favorable price for its retail clients.
Two factors must be taken into account by the broker for the best execution to be recognized as valid:
- the execution price of the order (purchase/sale);
- the transaction cost that the broker will pay to carry out the execution.
Note : So think twice before requesting professional investor status from your stockbroker (for example, to obtain higher leverage), as you will lose this right to guaranteed best execution.
How does it work in practice?
If your stock broker is regulated in Europe, he must guarantee you “best execution”. However, in recent years, new players seeking to compete with major stock exchanges have emerged. These are MTFs (“multilateral trading facility”) and “dark pools”, which do not necessarily apply the execution rules that are usually found on historic stock exchanges.
Please understand that MTFs and/or “dark pools” do not always execute orders at the best prices and rarely distinguish between retail orders and professional orders.
The best way to be certain of obtaining the “best execution” is to turn to a stock broker who undertakes to execute all of his clients’ orders on one of the main stock exchanges, which are governed by financial regulations.
Euronext and its Best of Book service
When your stock broker transmits your order to buy or sell shares on Euronext Paris via the Best of Book service, it is executed at the best price available among all the potential counterparties present on the stock exchange, including certain counterparties reserved for individuals. Your order will be identified as being an order initiated by a private investor and it will benefit from advantageous prices reserved for private individuals in the Euronext book, guaranteeing you:
- access to the best prices available in Europe thanks to liquidity providers dedicated to improving your execution price;
- an actual execution price of your order with a negotiation carried out in full competition within the Euronext Central Order Book (which says competition, says multiplicity of counterparties in the order book, guaranteeing a competitive and impartial market) ;
- higher quality of execution allowing you to obtain a price improvement. Best of Book is the trading platform that outperforms the EBBO (European Best Bid & Offer) the most, namely the benchmark reflecting the best possible price available among all European trading platforms.
Thus, with these conditions, your orders may have a better final price for the purchase or sale of securities. In addition, as a retail investor, you will also have access to a number of additional available shares.
According to data provided by QuantHouse, in 2021, thanks to “Best of Book”, orders from retail investors benefited on average from a price improvement of €3.07 by placing their orders on Euronext rather than on an alternative platform. . In addition, Best of Book enabled individual investors to obtain a better buy or sell price for 98.68% of the orders processed. In total, more than 106 million euros in savings have been made by individual investors.
Example of execution of stock market orders for the investor
In this illustrated example, we will compare the execution of an order for 100 shares which would have been initiated by a retail investor with the execution of an order for 100 shares which would have been initiated by a professional investor at the same time.
In the main order book (accessible to everyone), we see that 50 shares are available for sale at a price of 250 EUR and another 50 shares are available at a price of 300 EUR.
The liquidity pocket specially reserved for retail investors shows that there are 50 additional shares that are available at prices of 200 EUR.
The case of the professional investor
Professional investors wishing to buy 100 shares can buy 50 at a price of EUR 250 (top of book) and 50 at a price of EUR 300 (level 2 liquidity). He will therefore have bought 100 shares at an average price of 275 EUR.
The case of the retail investor
Individual investors who also wish to buy 100 shares, but who have access to a reserve of special shares, can buy 50 at a price of EUR 200 and 50 at a price of EUR 250. He will therefore have bought 100 shares at an average price of 225 EUR.
In conclusion, remember to always ask your stock broker where and how your stock market orders are executed because beyond brokerage commissions, there may be indirect transaction costs representing significant amounts over time.
Image source: Freepik
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