MARKET DISRUPTION: The “Instividual,” Individual and The Institutional


FROM THE PUBLISHER: In this new column, Digital Wealth News features the thoughtful meanderings of history and technology in the financial markets under the pen of longtime market industry veteran Rob McHeffey. Enjoy!

By Rob McHeffey

On trading desks of Olde, most institutional traders nicknamed agency-based retail orders as “the red headed step-child.” One may dislike the saying, but nonetheless that’s what retail flow was coined back in the day. “We can’t be bothered with these unimportant “odd-lot’s,” under-the-radar, unsophisticated flow, it’s not worth our time” quipped The Institutional.

Fast forward to the present where the Advisory Managed Account Industry or “Wrap SMA’” has a massive, collective AUM of over $10T according to the Money Management Institute, more than doubling the size of Hedge Fund AUM. The HNW and UNHW “Instividual” investors (High Net Worth and Ultra High Net Worth) residing on Private Wealth, Custodial or Wrap platforms have been exponentially growing over the past decade, conversely, the Institutional market with assets in pension fund, Taft-Hartley, endowment assets are all on a slow to no growth vector.

Where the once lonely island of retail orders were banned and remained isolated to frustrated agency desks, institutional traders are now clambering for this “dumb” flow (don’t shoot the messenger, that’s what traders call(ed) it!). The Liquidity Providers whose economics are based on market spreads not only clamber for these orders, but for years have PAID for said Payment for Order Flow.

I would be remiss not to bring to light the issues as well with the non-accredited retail clients that do not have enough capital to be on Advisor guided “Wrap” platforms that have been flocking to the retail platforms like Robinhood, eTrade, Think or Swim (TD) and Betterment for access to “no commission trading.” What are the respective models for revenue generation on these individual investor trading systems? Again, Payment for Order Flow. There certainly is a discussion to be had on whether uninformed investors should be incurring inherent risk by ‘day trading’ on a whim, or if the “Ape Army” collective social media memes to short squeeze the likes of AMC is justified, but that’s a column for another day!

In the meantime, with this unprecedented increase in size of the Private Wealth Management space, it has run into growing pains and setbacks, notably with the existing absence of high- grade technology to that of their institutional brethren. So, decisions are being made whether to buy expensive technologies or partner with outsourcers of middle/back office, trading and compliance. The definitive and inarguable direction is to outsource.

The ‘outsource vs. avoidable expenditure’ decision by Private Wealth managers and the selection of outsource partners are often pivotal for business growth and scalability. As Instividual investors continue to demand to allocate to those managers that have reliable and institutional grade infrastructure, outsourcing front and middle office services helps managers attain that goal without bearing the costs. The overwhelming sentiment on the buyside of the street is “Our job is to pick stocks and make money for our clients, let the experts compliantly trade, clear and reconcile.” Cost Centers of Olde are now becoming New Centers of Performance by running tight ships and reigning in unnecessary and preventable expenses. The retail-oriented community is slowing and surely advancing in the New Age of Technological Enlightenment.

Robert McHeffey is a 35 yr electronic trading veteran working for many top tier innovative broker dealers as well as running his own market neutral hedge fund in the mid 2000’s.

He holds firm on two mantra’s 1) “An expanding mind rarely returns to its original form and 2) Keep everything as simple as possible, but not any simpler.” Albert Einstein