The WFE Calls On ESMA To Address Growth Of Bilateral Trading In European Shares

The World Federation of Exchanges (WFE), the global industry association for exchange groups and central counterparties (CCPs), today called on the European Securities and Markets Authority's (ESMA) to consider the impact of the growth in bilateral trading on well-functioning markets.

The WFE today published its response to ESMA’s consultation on the structure of European equity markets, noting it’s an opportune moment to consider the importance of good market design and the role that regulatory policy has on creating efficient markets in the region.

While bilateral trading has continued to grow across Europe, the UK and the US, transparent multilateral markets remain the primary source of price discovery. Bilateral trading relies on prices established elsewhere - on lit, public markets - and, if bilateral trading continues to expand, it could reduce the proportion of trading that contributes directly to the formation of market prices.

The way markets are structured is fundamental to effective capital raising and ensuring the best outcomes for end investors. Transparent secondary markets underpin investor confidence and effective price formation, which in turn supports the ability of companies to raise capital efficiently.

There is an important gap in ESMA's analysis. Without data covering UK trading in EEA shares, it is difficult to build a complete picture of trading activity, particularly in relation to systematic internalisers (SIs), over-the-counter (OTC) trading and other off-book activity.

The WFE challenges the suggestion that "addressable" liquidity is properly defined in the current approach. Some forms of liquidity are in practice available only to certain market participants, whereas multilateral trading venues provide fair and non-discriminatory access across the market.

Closing auctions, which have grown in popularity over the last decade, are important; they are often a more efficient mechanism for executing large trades, because they concentrate liquidity at a single point in time. They also play a particularly important role for European asset managers, many of whom rely on the closing price as a key benchmark for valuation, portfolio rebalancing and index tracking purposes.

Nandini Sukumar, Chief Executive Officer of the World Federation of Exchanges, said: "Strong secondary markets are essential to healthy capital markets in Europe. Investors need confidence that prices are formed through open competition and companies need those prices to reflect the true value of their businesses when they come to market or raise additional capital.

"Market structure debates can appear highly technical, but they have consequences for investment, economic growth and the competitiveness of public markets. Any changes to the regulatory framework should protect the quality of price formation while continuing to support efficient execution for investors."

Richard Metcalfe, Head of Regulatory Affairs at the World Federation of Exchanges, said: "The evidence available today suggests that exchanges and multilateral trading venues are where price discovery takes place. Other execution mechanisms have an important place in the market, particularly for certain types of trading, but they rely on prices formed in transparent markets rather than creating those prices themselves.

"Before considering further changes to market structure, it is important that policymakers have the fullest possible picture of trading activity. That includes understanding the role of UK trading in EEA shares and looking carefully at the continued growth of bilateral trading and systematic internalisers."

The WFE also encourages further analysis of the impact of bilateral trading on price discovery and supports greater transparency around SIs to help ensure a level playing field across different trading venues. Strong secondary markets matter for investors seeking fair and reliable execution and for issuers.

Effective price formation and liquid secondary markets support valuations, reduce the cost of capital and make public markets a more attractive place for companies to raise finance.

Read the Consultation Response.