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Attracting retail investors to EU capital markets - Financing of the EU economy

The Importance of Retail Investors in the Market Price Formation Process

By Ximénez Rodríguez Santiago - Director General, BME Market Data, Deputy Director, International Affairs BME, Bolsas y Mercados Españoles (BME)

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The price formation process for financial assets in order-driven electronic markets improves substantially when buy/sell orders from retail investors are entered into the order books alongside orders from institutional investors.

The fact that different types of investors interact and participate in the order books highlights the need for equal treatment when accessing the prices available on the order book. Order books shall operate on a price priority basis. When orders are placed at the same price, determination shall be based on time of entry, with earlier orders receiving priority.

Retail investors play a role in providing stability and liquidity to the order book and to the price formation process, but need protection. In this regard, we must ensure that information is disclosed in such a manner that it becomes equally available to all investors, so that they are able to modify or cancel their orders before execution.

Technology enables people from almost anywhere in the world to access information. Just as prospectuses are designed to defend retail investors from asymmetric information, markets must provide protection to retail investors by granting them time to read and analyse any new information arriving to the market.

All this new information has to be adapted to the market’s ultra-low latency performance. In this respect, instruments may be suspended or auctioned as a result of new information, with the aim of providing retail investors with the opportunity to update their orders accordingly.

Therefore, it is of crucial importance that all types of investors have equal access to information on corporate actions and to real time data to ensure they all play by the same rules.