Date: 2nd December 2022

Keynote address by Jella Benner-Heinacher on market structures, “retail” investors, and payments for order flows (PFOF)

Thank you for the invitation and congratulations to FESE to organize such an impressive conference in Prague.

I would have loved to be personally in this beautiful city of Prague but unfortunately, I can only attend virtually.

Nevertheless, I am very honoured to give you the opening address today.

Let me, first of all, introduce BETTER FINANCE. We are the European Federation of Investors and Financial Services Users and hereby represent more than 4 Mio retail investors including individual and small shareholders, fund and retail investors, savers, pension fund participants and also life insurance policyholders.

The idea for a union of capital markets was proposed more than seven years ago in the Presidents’ report as one of the pillars to complete the Economic and Monetary Union. The first Capital Markets Union Action Plan was rolled out by the European Commission in 2015 and included a list of 33 ambitious objectives that would “strengthen the link between savings and growth”.

Unfortunately, seven years and six high-level reports later, Europe’s capital markets are not further than their status quo at the moment when the CMU Action Plan was launched. As the name of this conference suggests, swift action is needed to unleash the potential of our capital market ecosystem in order to attract more citizens to invest in the real economy and in conditions of transparency and market efficiency.

As we look at the current challenges: we see the war against Ukraine, rising energy and food prices, and high inflation rates just to name a few of them.

So, the main question today is: how can we make Europe’s economic base more resilient, competitive, and fit for the green and digital transitions.

To reach these goals we need first of all a well-functioning Capital Market Union. Therefore, it is essential that EU capital markets become more efficient and allow companies to access more diverse sources of funding – notably equity funding.

Ladies and gentlemen, it is grotesque to see that investors in Europe are forced to manage 27 separate different withholding tax procedures and the same is true for exercising the rights as shareholders across Europe. We cannot ask investors to buy European equity if we are not even able to establish a level playing field within the EU which means no more barriers between the individual markets in the EU for the retail investor.

And to be honest: the huge transformations in front of us: the green and the digital transformation which lie ahead of us, cannot be done without the retail investor.

And to start with:

The optimal allocation of households’ savings to finance growth, jobs, and sustainability cannot be done without transparent and well-functioning market structures.

From a retail investors’ point of view, stock exchanges enable them to securely and rapidly sell or buy an asset at a fair price by connecting them with a very large and diversified pool of investors wishing to buy or sell an asset. This is called “price formation” and it results from the publicity of pre-and post-trade data in real-time, or as close as possible to real-time.

This is even more important now as research points to an increased appetite for non-professional savers for direct investments, such as listed shares and bonds. At the same time, “do-it-yourself” investing is on the rise due to new FinTech models, which brings capital markets closer, and more accessible, to the average saver.

As such, I wish to bring my contribution for today’s debates by presenting where “retail” investors fit the current landscape, what can be done to ensure that investing and trading is fair and attractive for “retail” investors, and what are the latter’s views on payments for order flows.

First, I will set the scene and present you with a few details from BETTER FINANCE’s research on the New Retail Investing Environment and why “retail” investors and market structures must be considered holistically.

Then I will continue by giving you a bit of insight on “retail” investors’ experience with trade data transparency: what our mystery shopping concluded, what are the policy recommendations and what can be improved. Most interesting for this audience, I will touch upon the topic of a consolidated tape.

Further, I will speak about payments for order flows and the wider context of inducements. Given it has become a “hot” topic of debate, and it divided stakeholders and decision-makers across the EU, I wish to present to you what the “voice of European savers and investors” has to bring to this discussion.

I will conclude my address with a few remarks on where we are and where we should have been, and what can be done to correct this situation in the near future.

To begin with, the developments observed throughout the COVID-19 pandemic, namely that a large wave of previously inactive savers started investing, receive far too less attention than it should. We noted a steady decoupling of EU households from capital markets in the past 40 years as they were slowly being driven away through passive, packaged investment products. Now EU households hold a mere 6% of their financial savings in listed shares and bonds. If anything, this is clearly “unhealthy” as it deprives the EU’s capital markets of a large pool of stable liquidity.

Second, the initial surge in “retail” investments was felt on regulated markets: reports from the French, Belgian, Polish, Romanian or Danish stock exchanges showed a significant increase in the number of trades which, coupled with the relatively small(er) volume and value, is suggestive of a marked “retail” presence. This brought about two important effects: first, it cushioned the drop in equity indices during the first quarters of the pandemic, and second, it contributed to reaching historical highs in the market capitalisation of EU-listed companies.

In fact, academic research shows that “retail” investors tend to curb the illiquidity curve during phases of market turmoil due to their contrarian nature, which is another reason why “unleashing Europe’s capital markets” must start by considering the needs and interests of the “retail” sector. The retail investor still is and will stay an important stabilizer of the capital markets.

The development of new business models, especially those integrating technology and digitalisation in traditional financial services, has brought about positive effects. Most notably, it appealed to the younger generation of investors and attracted peers to open brokerage accounts and invest in shares, bonds, or listed exchange-traded funds. Besides a step in the right direction from a financial planning point of view, it also provides non-professional savers with direct exposure to capital markets, which is a unique tool for financial education.

Neo-brokers” allow savers to easily open brokerage accounts, see bid and ask quotes, and trade securities on Europe’s regulated exchanges. However, there are two prerequisites for delivering an optimal experience and result for non-professional investors: first, transparency of equity and bond trading; second, accessibility and user-friendliness of delayed market data.

In a “mystery shopping” report conducted by BETTER FINANCE in 2021, we observed first that the transparent EU-based regulated markets have seen their share of European equity trading declining from about 70% to only about 18% by 2019. This was partly due to MiFID II, which backfired and made the EU the hub for dark pools and systematic internalisers: from about 14 SIs registered in 2017, the number of SIs took off after the entry into force of MiFID. A very critical development that we observe since then. Currently, ESMA registers showed a total of 186 SIs active in the EU27. Systematic internalisers benefit from several exemptions and waivers, notably on trade transparency.

At the same time, BETTER FINANCE aimed to replicate the experience of the “average” retail investor when seeking pre-and post-trade data for listed equities. At the time, the findings were suboptimal as just a few of Europe’s largest execution venues by volume fulfilled all the requirements imposed through the MiFID II and MiFIR framework.

While no changes were done at EU level, some of the market operators surveyed in the report did bring improvements to the manner in which delayed trade data is presented, making it easier for the “average” retail investor to find bid/ask quotes and prices at which orders are executed.

Among the recommendations put forward to improve the status quo, BETTER FINANCE included two: one on a European consolidated tape and another for systematic internalisers. To ensure that investors enjoy optimal outcomes, EU capital markets must foster adequate price discovery and formation mechanisms, which can only happen through “lit” trading of “retail” orders, regulated markets, and “lit” multilateral trading facilities.

Retail investors must easily access pre-and post-trade data to be able to make informed trading decisions and, also, evaluate best execution of their orders. In practical terms, this translates to a consolidated tape that allows ex-post verification of obtained prices and best execution deals by investors.

What matters is that individual investors can ex-post easily and freely check whether their orders have been executed in the best of their interests. Therefore, all retail orders must be precisely time-stamped, and traceable and include information on the precise market venue(s) on which the order was executed.

Our proposals for the Consolidated Tape were, in short:

  • to start with bond markets
  • to ensure that the consolidated tape does not distort competition in favour of opaque, non-transparent venues
  • to increase transparent ("lit") trading in the EU
  • to reduce further market fragmentation;
  • to avoid “retail" flows going to internalisers
  • to make the consolidated tape freely accessible, in a user-friendly way, to retail investors,


  • to ensure that the consolidated tape is governed by public authorities.

This bridges my address to you today to another highly debated topic, that of payments for order flows.

Last year, EU authorities started the review of the main instrument regulating market structures at EU level, namely the Markets in Financial Instruments Regulation (MiFIR), which I am sure is on everybody’s minds and policy agendas these days. Sparked by the GameStop and AMC cases in the US, the practice of PFOF was steadily uncovered as creating many challenges and posing many risks of detriment for “retail” investors.

PFOFs were the backbone of new brokerage business models that proposed user-friendly, low-cost trading for non-professional users.

BETTER FINANCE looked at the revamped business models that attempt to put the “retail” investor more in charge, to which we generally refer as neo brokers. The latter have become popular for the low fees (even “zero commission”) services accompanied by direct access to a wide range of securities (shares, bonds, derivatives) and “do-it-yourself” (DIY) investing.

However, the question all seek to answer is whether PFOF is beneficial or not for retail investors?

We looked at available evidence – including qualitative and quantitative data – on PFOF. Unfortunately, our key findings are that PFOF can create the illusion of free trading as it hides implicit costs, leads to conflicts of interest over best execution, can distort competition, and ultimately trigger an overall price deterioration for all investors. After all, even neo-brokers need a well-functioning business model which can make profits.

Retail trading must be simple, transparent, cost-efficient, and done in the best possible conditions for individual, non-professional investors. Our most important concern is that payments for order flows (PFOF) create a conflict of interest between brokers and SIs, which is not in the best interests of the client.

While the best solution firmly remains a straightforward ban on inducements, including PFOF, certain alternative solutions can be looked at in order to deliver a high standard of investor protection and ensure that “retail” clients are delivered the best outcome.

Let me conclude. Ladies and gentlemen.

Investors’ trust is an essential condition for their participation in capital markets and to build such trust: transparency is key.

Today we know that retail investors are stable shareholders that induce long-term sustainable capital. This contributes to favourable conditions for IPOs in the primary market as well as for the company’s onward’ life on the secondary markets.

By all means, the EU’s economy and its capital markets are facing challenging times, and the long-term and stable funding source of EU households will be needed more than ever to bridge this phase. At the same time, EU savers need more “retail” investments to hedge for future financial needs and ensure that their savings yield better results.

To maintain the current large wave of investors into EU’s capital markets, but also motivate their peers and future generations to invest, the EU needs to deliver an investing ecosystem that is fair, cost-efficient, transparent, and ultimately attractive for non-professional savers.

As mentioned at the beginning of my address, a lot of time has passed and many report or action plans have been proposed and revamped in order to build the Capital Markets Union. Unfortunately, the results have been suboptimal, which should prompt us to consider direct, firm decisions that will shape – for the better, I hope - our Union and its capital markets for decades to come.

Thank you very much for your attention.