Can you trade AIM shares with direct market access?

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Reader Q: Can you buy and sell small-cap AIM shares direct on the exchange order book?

A reader has emailed us with a very interesting question about how they can buy shares on the AIM market inside the bid/offer spread to get better pricing and reduce trading costs.

The question that was asked concerns limit orders, that is an order to buy or sell a security at a specific price and typically one that is different to the prevailing bid-offer spread. The difference between the price at which you can sell and the price at which you can buy in that security.

More specifically the reader asked whether it’s possible for retail traders and investors to leave a limit with a broker, that is inside the bid-offer spread. Because as they point out in UK smaller companies and AIM-listed stocks, that spread can be as much as 10% of the share price.

This, of course, means that if an investor buys a stock with a 10% bid-offer spread they need to see to see the stock price rise by 10% before they break even.

Being able to place limit orders, and trade inside the bid-offer spread could reduce this break-even hurdle quite significantly.

What’s more, we were asked could limit orders be placed, if you are dealing for a stocks and shares ISA or SIPP account and can this be done electronically.

I put these questions to several of the UK’s leading investing platforms.

The answer is that clients can leave limit orders, for example, Charlie Musson, Brand Director at AJ Bell told us limit orders can be placed for any UK share that is traded in sterling, and that they can be placed online, using either the website and mobile app or via the telephone.

Mr Musson also noted that a limit order can be placed with AJ Bell for ISA, pension and general investment accounts.

It’s even possible to place limits on international stocks with the broker, over the phone. Though certain restrictions around order size and liquidity in the underlying will apply here.

Limit orders at AJ Bell will not be automatically shown to the markets, and will instead be monitored in house, for a period of up to 90 days. Limits are transmitted to the market for execution if and when the bid offer price moves to a point where the order coud be executed, however an execution is not guaranteed.

At Hargreaves Lansdown clients can leave limit orders online, using the HL Live App and they can do so for all LSE-listed equities, including AIM stocks, ETFs and Investment Trusts.

Clients can choose from buy or sell limit order types, these orders are valid for 90 days.  During this time they can be monitored within the pending orders section of the client’s online account.

I note though that these orders are minded internally, which means that the potential trade is not live on the order book, or left with a market maker, in a quote-driven stock, to be executed against their order flow.

Hargreaves Lansdown clients can also place limit orders over the telephone with the firm’s dealing team, in any security offered by the broker, that has a secondary market, subject to the counterparties in that market being willing to accept such an order.

These telephoned limit orders can be left on a good-for-the-day basis and clients can also specify ‘all or nothing, ’partial fill’ or ‘minimum fill’ requirements, when they place their order, phone dealing charges apply. Hargreaves will use their expertise and judgement to try and achieve a fill for the client. However, once again an execution is not guaranteed and Hargreaves Lansdown points out that it does not offer a DMA service.

DMA or Direct Market Access offers clients the ability to interact directly with the order books of the LSE SETS trading systems.

However, many retail brokers don’t operate a DMA service because of the structural, regulatory, technological and cost implications of doing so which are significant in each case.

Instead, retail brokers often have access to what’s known as the RSP, an online trading network run by the London Stock Exchange that allows market makers to compete for retail flow on a order by order basis.

Market makers on the RSP can choose to make price improvements in a given stock or stocks, whilst brokers can poll the RSP electronically with pricing requests, and if a limit order falls within a price improvement offered via the RSP, then that limit order should be executed.

At Interactive Investor, which is now owned by abrdn, clients can also place limit orders online, or over the telephone and this facility includes AIM-listed stocks.

However, that limit will not be made public or exposed to the market. Instead, it will be minded in-house until such time as it can be executed. II do make this point clear to clients when they submit limit orders.

Once again this is an important distinction, because it means that market makers in a security will be unaware of the limit orders existence and therefore will have no opportunity to fill it, even if they wanted to.

However, Interactive Investors are able to expose limit orders to the market on request, on a case-by-case basis, and clients will need to call the dealing team to initiate this, however, different dealing charges are likely to apply.

Getting a limit order executed will depend on a variety of factors such as the size of your order, the level of liquidity and activity in the security in question and even the relationship your broker’s dealing team have with the market makers in that stock.

In summary then limit orders can be placed with the large stock brokers, however there are limitations to this process, and investors need to be aware of what they are before they use this order type.

It also depends on the size of your account, the relationship you have with your broker and what sort of volume are trading.

The ultimate answer is that if you have an investing account, phone up your dealer and ask nicely. They may then phone up one of their market maker friends and see if they can work a bid below the offer for you.

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