Efama, the industry body for European asset managers, has called on EU policy makers to preserve competition in the EU’s equity markets and not let it shift back to one favoured by incumbent exchanges rather than alternative venues.
The association, along with the Association for Financial Markets in Europe (AFME), has published a paper described as a “message from investors and market participants to policymakers”.
The paper and its proposals come as the EU is preparing to implement its Market Integration and Supervision Package (MISP) initiative. According to Efama and AFME, policymakers must avoid this becoming a “free-for-all” to reopen every aspect of equity market structure without considering the impact, when markets have been working efficiently.
The 2007 Markets in Financial Instruments Directive (MiFID) had an enormous impact on Europe’s equity markets by lessening the grip of national stock exchanges and introducing a range of alternative venues.
However, while this increased competition, it also fragmented liquidity for market participants, making trading a more complex process.
The fear of the associations is that, in the upcoming reforms, the market could tilt back in favour of incumbent exchanges, who have been pressing the European Commission to encourage more liquidity back onto lit venues.
The priority, state the associations, should be scaling up Europe’s capital markets through competition and innovation, not restricting alternative trading mechanisms.
“As policy makers consider the Market Integration Package, it will be important to keep its objectives in focus: advancing the global competitiveness of EU markets and delivering regulatory simplification,” stated Adam Farkas, AFME chief executive.
“Rewriting equity market structure rules in a way that disproportionately benefits a handful of dominant exchanges would risk running counter to these goals.”
According to Farkas, Europe’s largest exchanges have “yet to articulate how EU equity markets can scale and compete globally” and instead appear “primarily focused on restricting competition from alternative trading models”.
For Efama’s director general, Tanguy van de Werve, a “sustainable and meaningful” consolidated tape for EU equites would help to make the market more attractive and efficient.
“[Efama] has every bit of faith that a well-designed consolidated will deliver the transparency needed to continue to deepen and grow Europe’s capital markets,” said Van de Werve.
Yet beneath the policy debate sits a deeper question about the health of Europe’s equity markets themselves, SIX, the Switzerland-based exchange operator . While competition has flourished, the quality and distribution of liquidity has become increasingly uneven, according to the exchange.
Of particular concern is the disproportionate amount of trading done at the close of day.
“Europe’s equity market doesn’t lack innovative execution options. What it lacks is consistent and visible liquidity during the trading day,” said Rob Cranston, head of equity business development sales strategy at SIX.
“If meaningful risk transfer continues to concentrate at the close, price discovery weakens, spreads become fragile when real size appears, and investors are left with fewer reliable signs of fair value.”
Each mechanism serves a purpose, but collectively they are compensating for a thinning lit order book, according to Cranston. “If we want stronger intraday price formation, we need to make it more attractive to display liquidity, not simply constrain alternatives,” he said.
Cranston admitted that MiFID brought competition and innovation but also fragmented liquidity and reduced the share of trading happening on lit markets. “The challenge now is restoring balance, not rolling back competition,” he said.
