Retail Price Improvement Provides Unique Opportunities for Retail Investors and Liquidity Providers

Key Takeaways

• Retail trading has increased, but the majority of equities volume is executed off-exchange, limiting opportunities to interact with retail order flow on-exchange
• Retail Price Improvement (RPI) Orders on Cboe's BYX Equities Exchange provide a unique opportunity to interact exclusively with Retail Orders on-exchange, at price improvement levels in 1/10 of a cent increments
• Ample retail missed opportunities exist on BYX in high value stocks, including large-cap stocks in the S&P 500 and Russell 1000 indices
• Cboe continues to enhance its RPI program, with the proposed introduction of an Enhanced RPI Order with a discretionary step-up range designed to  facilitate more executions with meaningful price improvement, pending SEC approval

Retail trading has increased in recent years, with more retail participants investing in a variety of asset classes, including equities. However, a large portion of this is executed off-exchange, limiting the opportunities for on-exchange investors to interact with retail order flow. Cboe has introduced many incentives to increase on-exchange retail trading, including Retail Priority, pricing incentives for low cost remove and premium rebates for Retail Orders¹, and the EDGX Retail Membership Program, a program that gives retail brokers that become a direct member on EDGX discounts on port fees and market data. Retail pricing tiers also give growing retail firms additional rebates. The Retail Price Improvement (RPI) program on Cboe’s BYX Equities Exchange provides a unique opportunity for liquidity providers to interact exclusively with inbound Retail Orders seeking price improvement. In Cboe’s latest Equities Execution Consulting study, we examine the benefits and opportunities of interacting with Retail Orders through the RPI program.

How Do Retail Orders and RPI Work?

RPI Orders² offer the ability to give price improvement in 1/10 of a cent increments ($0.001) better than the NBB or NBO, to Retail Orders only. Retail Member Organizations³ that submit Retail Orders to BYX may receive price-improved executions on the exchange, giving retail investors exclusive access to price-improved liquidity from RPI Orders. Retail Orders can also receive price improvement by executing against other hidden liquidity in addition to RPI Orders, such as midpoint pegs, and may receive an enhanced rebate for interacting with price-improving orders.

A Retail Liquidity Identifier is sent on the BYX PITCH feed when there is RPI liquidity available on the BYX order book priced at least $0.001 better than the Protected NBB or Protected NBO. This message includes the symbol and side of the available RPI liquidity, but not the price and size. The Retail Liquidity Identifier will not be disseminated when there are no RPI Orders on the BYX order book priced at least $0.001 better than the Protected NBB or Protected NBO⁴.

Substantial Retail Missed Opportunities

The ADV of Retail Orders sent to BYX peaked at 148 million shares in Feb 2023, and has decreased since, but has remained fairly stable at around 78 – 91 million shares per month in 2024. 94% of these marketable Retail Orders are set to only interact with price-improving orders, highlighting a consistent presence of retail activity that is specifically seeking price improvement.

Of these retail shares, on average, approximately 60 – 120 million shares of marketable Retail Orders are unfilled or only partially filled⁵.  Figure 2 below illustrates the missed opportunity for liquidity providers to interact with retail-attested⁶ order flow on BYX.

Diversity of Retail Liquidity: Not Just Meme Stocks

There is a common misconception that retail order flow is dominated by sub-dollar meme stocks, but our analysis of the missed opportunity retail order flow on BYX shows there are missed Retail Orders across price groups, market capitalization and sectors.

Figure 3 below shows retail missed opportunity volume by price group. The majority of missed opportunities for Retail Orders are in the mid-tier range ($1-$24.99), with less than 8% of stocks falling below the sub-dollar mark.

Missed retail opportunities on BYX encompass a range of market caps, with large-cap and small-cap stocks each making up 27% of volume, as shown in Figure 4. Together, large and mid cap stocks comprised 45% of the total missed opportunities in 2023.

There is ample opportunity in large cap names, including those in securities that make up large-cap U.S equities indices such as the S&P 500 Index (SPX) and Russell 1000 Index (RUT).  Figure 5 showcases the average daily volume (ADV) of retail missed opportunity for securities in the S&P 500 and Russell 1000 indices over the past 14 months. On average, 11 million retail-attested missed opportunity shares are associated with names in these indices per day, accounting for 14% of the missed opportunity.

The presence of missed opportunities in high-priced, large-cap stocks shows clearly that retail-attested shares on BYX are not limited to sub-dollar stocks.  There is substantial retail volume in well-established and widely held stocks, providing ample opportunities for liquidity providers to engage with Retail Orders in these key market segments.

There is also further diversity in product types and market sectors. 31% of the missed opportunities in Retail Orders were submitted in exchange traded funds (ETF) in 2023, with the remaining in equities. As shown in Figure 6, Healthcare, Consumer Discretionary and Information Technology lead the pack in retail equities orders, each representing over 17% of the total missed retail opportunity.

Overall, we see that there is ample volume and diversity in missed opportunities from the Retail Orders on BYX.

RPI Price Improvement Savings on the Rise

Retail Orders that interact against RPI Orders and other hidden, price-improving liquidity receive an augmented rebate on BYX, in addition to price improvement savings. As depicted in the chart below, the average price improvement per RPI share⁷ increased approximately 48% between January 2023 and January 2024, with a peak of $0.0043 per share in November 2023. While the price improvement per share has decreased since to $0.0033 in March 2024, it is still higher than early 2023 levels. The upward trajectory in price improvement signifies significant potential savings for Retail Orders on BYX, in addition to the rebate provided.

Superior Execution Performance by BYX RPI Orders Relative to BYX Non-RPI Order

Markouts, a measure of adverse selection post-execution, are commonly used to assess execution performance. Our analysis reveals that RPI Orders on BYX exhibit better performance compared to non-RPI Orders adding liquidity to BYX, with a significant difference in markouts. Figure 8 below shows that RPI Orders have less adverse quote movement after execution than non-RPI Orders, based on an analysis for the month of March 2024. This advantage is particularly pronounced from 1 to 10 milliseconds after execution, where RPI Orders exhibit substantially better markouts. This suggests that trades executed against RPI Orders tend to yield more favorable outcomes in terms of minimizing adverse selection.

Enhanced RPI Orders: Increasing Opportunities to Execute Against Retail

Currently, only 0.01% of RPI Orders on BYX are executed at the midpoint. 98.5% of buy RPI Orders are executed between the bid and the midpoint, while 98.4% of sell RPI Orders are executed between the offer and the midpoint. This execution pattern produces less price improvement for Retail Orders than would be achieved by midpoint executions and highlights an opportunity to increase executions against Retail Orders by enhancing BYX’s RPI program. To help facilitate more executions with meaningful price improvement, Cboe has filed to introduce an Enhanced RPI Order, pending Securities Exchange Commission (SEC) approval⁸.

An Enhanced RPI Order is designed to provide RPI liquidity providers with the ability to post an order with a defined limit price while also including the ability to “step-up” and execute at a more aggressive price within a pre-defined step-up range included on the Enhanced RPI Order. The Enhanced RPI Order’s step-up range will allow an Enhanced RPI Order to potentially gain execution priority over other resting orders on the same side of the BYX order book in exchange for offering meaningful price improvement to contra-side Retail Orders. 

RPI Orders and Enhanced RPI Orders are both positioned to contribute meaningfully to market efficiency and price-improved executions for Retail Orders sent to Cboe’s BYX Exchange. The addition of an Enhanced RPI Order with the inclusion of a step-up range aims to bridge the gap between the current execution patterns — in which most executions fall short of midpoint price improvement — and meaningful price improvement for retail investors.

Enhancing the Trading Experience for Everyone

Cboe's RPI program offers significant advantages to liquidity providers that choose to submit RPI Orders that interact with Retail Orders, as well as providing Retail Orders the benefit of price-improved executions. BYX’s RPI program aims to incentivize on-exchange liquidity provision for retail investors and enhance the trading experience for all.

Please reach out to your Cboe sales representative if you are interested in learning more about the Cboe RPI program, RPI Orders, and Retail Orders on BYX.

^{[1] A “Retail Order” is an agency order or riskless principal that meets the criteria of FINRA Rule 5320.03 that originates from a natural person and is submitted to the Exchange by a Retail Member organization, provided that no change is made to the terms of the order with respect to price or side of market and the order does not originate from a trading algorithm or any other computerized methodology. [Rule 11.24, BYX Rulebook]}

^{[2] An “RPI Order” consists of non-displayed interest on the Exchange that is priced better than the Protected NBB or Protected NBO by at least $0.001 and that is identified as such. [Rule 11.24(a)(3), BYX Rulebook].}

^{[3] A “Retail Member Organization” or “RMO” is a Member (or a division thereof) that has been approved by the BYX Exchange under Rule 11.24(b) to submit Retail Orders. [Rule 11.24(a)(1), BYX Rulebook].}

^{[4] See Rule 11.24(e), BYX Rulebook.}

^{[5] Missed opportunity was calculated by summing the remove marketable retail-attested order volume that were entirely unfilled, and orders that were only partially filled.}

^{[6] Retail Orders must originate from an attested Retail Member Organization (“RMO”).  See page 4 of Retail Member Organization Application, available at: https://cdn.cboe.com/resources/membership/BYX_Retail_Member_Organization_Application.pdf}

^{[7] Price improvement per RPI share refers to the dollar amount by which the execution price of a Retail Price Improvement (RPI) order  improves upon the National Best Bid and Offer (NBBO) at the time of execution. It is calculated by taking the difference between the execution price and the far touch of the NBBO for the remove side.}

^{[8] The filing is available at: https://www.sec.gov/files/rules/sro/cboebyx/2024/34-99311.pdf}

There are important risks associated with transacting in any of the Cboe Company products or any digital assets discussed here. Before engaging in any transactions in those products or digital assets, it is important for market participants to carefully review the disclosures and disclaimers contained at: https://www.cboe.com/us_disclaimers/. These products and digital assets are complex and are suitable only for sophisticated market participants. These products involve the risk of loss, which can be substantial and, depending on the type of product, can exceed the amount of money deposited in establishing the position. Market participants should put at risk only funds that they can afford to lose without affecting their lifestyle. © 2024 Cboe Exchange, Inc. All Rights Reserved.