The Retail Service Provider (RSP) network is the bedrock to the online retail broker market in the UK. By better understanding this network, as well as the processes behind the buying and selling of shares, you can help ensure you receive the best price possible for your investments and trades.
What happens when buying or selling shares through an online broker?
To begin with, your online broker will electronically send a request for a quote (RFQ) to a network of Retail Service Providers (RSPs), polling them for the most competitive price currently available. Reporting this price back to you almost instantaneously, you have in the region of 15-30 seconds to decide whether or not to accept or reject this offer. Should you decide to accept this offer, your order goes to the RSP and the deal is executed. If you do nothing or cancel this offer, the quote lapses.
More often than not there can be a slight improvement on the price initally presented to you when the trade is actually executed.
What exactly are Retail Service Providers (RSPs)?
More commonly referred to as market makers, Retail Service Providers are typically Investment Banks or Brokerage Houses that provide electronic quotes to retail investors via an online broker – as previously discussed.
By guaranteeing to both buy and sell a stock up to certain limits at all times (thus making the market), these companies accept considerable risk. However, to counteract that risk, they are able to profit from the spread between the bid and the ask price.
Why was the Retail Service Provider (RSP) system devised?
By allowing the near-enough instantaneous execution of smaller retail orders – typically under the Exchange Market Size (EMS) – the operations behind the buying and selling of shares by retail investors is massively improved. For instance, whereas retail orders were traditionally placed by phone, the RSP and broker under this new system need only converse by phone when dealing outside of the EMS.
How many RSPs (or market makers) typically provide a quote?
For starters, each security will have a different number of registered market makers – some as low as two, others as high as fifteen or more. Adding to this, each online broker will poll a different selection of RSPs when requesting a quote. Therefore, the answer depends on the stock in question and the brokerage being used. Unfortunately, though, brokers are known to be quite secretive as to the RSPs they have a direct relationship with.
How do I know if I am getting the best RSP quote from my broker?
The price depends entirely on the selection of RSPs your broker asks for a quote, as well as any special dispensations they might have with any of these. As such, when two investors deal in exactly the same shares at exactly the same time through two different brokers, then it is very likely that one will get a better price than the other.
Based on this, a large number of private investors will have more than one online broker. By having more than one, they are able to enter orders on both platforms and observe which is offering the best price without being obligated to buy or sell. This tactic can be of great benefit when trying to buy a smaller cap stock with lower levels of liquidity and during times of higher levels of volatility.
How can I circumvent Retail Service Providers (RSPs)?
Private investors that frequently trade a relatively large volume of shares may decide to opt for Direct Market Access (DMA), which allows the investor to interact directly with the SETS electronic book or SETSqx auction service.
Rather than being confined to the quotes provided by RSPs, the investor is able to have more control as they are able to interact with all registered offers and bids at a selection of different prices from whoever has access and a desire to transact, as orders can be placed by brokers, market makers, traders and private individuals directly.