The Commission proposal on OTFs has been subject to heavy debate in the European Parliament and the Council. There is wide agreement among policy makers that such a new venue type is needed for derivatives and fixed income products. This is fully in line with the international regulatory agenda and G20 commitments. However, FESE strongly believes that creating this new category for equities trading is not in the interest of European equity markets, companies and investors.
MiFID I has created competition between trading venues. On the other hand it has led to market fragmentation. FESE fears that the introduction of an OTF for equities will create a two‐tier market which risks leaving small and midsize companies behind and compromise a neutral price discovery process. The Commission proposal on OTFs tries to capture Broker Crossing Networks (BCNs) that currently operate on an OTC‐basis. In practice, the new category will make the current situation worse and undermine goals to increase efficient price formation process and transparency. FESE believes that neutral, efficient and competitive trading environment is best promoted by requiring BCNs to qualify as MTFs. That way, further fragmentation in the equities market may be avoided.
BCNs might capture a substantial amount of trading without being subject to market facing rules which essentially protect investors and ensure equal treatment of order flows across Europe's capital markets. FESE believes that the proposal for equities OTFs will hurt Europe's equity markets because it will direct order flow away from the current neutral trading venues, Regulated Markets and MTFs.
Regulated Markets and MTFs are neutral and open market venues. When the order flow disappears from these venues where investors provide capital to companies, the neutral and open market loses its value. This also has negative consequences for intermediation, since "local" players will increasingly have difficulties to provide the needed service to their clients in terms of primary market funding to companies and efficient order executions for clients. The losers will be small and mid-size companies which do not have the same opportunities as the larger companies do to use global market players when raising capital. In addition, some investors will face similar challenges in the secondary market in terms of order execution.
In summary, an OTF category for equities is not an open and neutral trading venue. It could potentially have significant adverse consequences for equity trading and the financing of the economy, in particular for the small and medium-sized companies.
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