In a new report, global securities regulators note that market fragmentation is on the rise, and they call on regulators to ensure that their rules balance the benefits of competition against the possible negative effects of fragmentation.
The International Organization of Securities Commissions (IOSCO) Friday published a new consultation report that examines regulatory issues driven by the evolution of market structure in recent years. It also proposes possible policy options and regulatory tools to cope with the potential effects of market fragmentation.
The report notes that in many jurisdictions, competition has increased and new trading spaces have developed in recent years. And, there’s a perception that the fragmentation of equity markets is on the rise.
“In particular, there is substantial market fragmentation in the U.S., Canada and a growing level of fragmentation in the EU, particularly in the United Kingdom,” it says. “In these regions, traditional exchanges compete for order flow with several non-exchange market trading systems and also with OTC trading systems.”
It also found that, in most jurisdictions similar rules now apply to exchanges and non-exchange trading markets, which was not the case when these same issues were studied back in 2001. However, it says that considerable differences remain in terms of OTC trading. “For instance, several jurisdictions stated that most of the trading which takes place OTC is not subject to any pre-trade transparency requirement or fair access rule,” it says.
Ultimately, the report concludes that securities regulators, “bear the responsibility for striking an appropriate balance between a market structure that promotes competition among markets, and one that minimizes the potentially adverse effects of fragmentation on market integrity and efficiency, price formation, and best execution of investor orders.”
The report makes a series of recommendations including that: regulators should regularly monitor the impact of fragmentation on market integrity and efficiency across different trading spaces; they should seek the consolidation and dissemination of real-time information; regulators should consider the potential impact of fragmentation on the ability of firms to comply with order handling rules and best execution obligations; they should monitor the impact of fragmentation on liquidity and ensure regulatory requirements provide for fair access to significant sources of market liquidity; and, that they should monitor for novel forms of market abuse that may arise as a result of technological developments.
The report is out for comment until May 10.