FESE response to IOSCO Consultation Report: Regulatory Issues Raised by Changes in Market Structure

13 May 2013

Given the increased levels of competition and the subsequent fragmentation in European markets, this IOSCO consultation is a timely contribution to examine how best to assist market authorities in relation to issues raised by market fragmentation.

FESE welcomes the work by IOSCO to identify and analyse the various regulatory issues raised by changes in market structure. Currently, European legislators are negotiating the review of the Markets in Financial Instruments Directive (MiFID I). They also state that market developments since MiFID have partially challenged the current regulatory framework applicable to different types of execution venues, i.e. Regulated Markets (RMs), multilateral trading facilities (MTFs), systematic internalisers (SIs), all signalling the need to provide for a refinement of the present framework. The overarching aim of the MiFID review is to ensure strong organisational requirements and identical transparency rules, and upgrade key requirements across all European trading venues to account for the greater competition and cross‐border trading generated together by technological advances and MiFID I.

In its  proposal for a new MiFID (MiFID II), the European Commission has stated that ‘market and technological developments have outpaced various provisions in MiFID’. FESE supports the goals of the MiFID Review to further the integration, competitiveness, and efficiency of European markets.

FESE has the following comments on this consultation:

• Regulators must not act to unintentionally create further fragmentation: In Europe, MiFID I has created greater competition between trading venues which has led to greater market fragmentation, therefore regulators must carefully consider any further regulatory proposals that could potentially further increase fragmentation.
• Increased fragmentation could create a two‐tier market: Increased OTC trading with restricted access to liquidity could create a two‐tier market which risks leaving small and mid-size companies behind as in practice, only few investors will have the possibility to access prices displayed and trade on broker‐dealers run platforms.
• Increased fragmentation can have a detrimental impact on price formation: Increased fragmentation would further fragment liquidity and compromise a neutral and transparent price discovery process. This is particularly the case in instances where additional venues would undermine goals to increase efficient price formation process and transparency.
• Need to ensure that the highest level of trading takes place on neutral and transparent venues: Regulators must take into account the benefits for all markets participants brought about by increased trading on neutral and transparent venues. These venues positively contribute to price formation and the assessment of best execution for clients. This function is not provided by any venue that is not open, neutral and transparent.
• Regulators must assess the impact of non‐open and non‐neutral venues on the real economy: The effect that any trading venue which does not live up to the goals of open, neutral and transparent price formation on equity trading and the financing of the economy, in particular for the small and medium sized companies, must be assessed.

Full response

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