IOSCO Consultation Report: Regulatory Issues Raised by Changes in Market Structure
IOSCO recently published a consultation report seeking comments on its recommendations for addressing issues stemming from increased market fragmentation. In a survey of its members, IOSCO found a rising trend in the fragmentation of equity markets, where the same financial instruments are being traded in multiple trading spaces. This trend was particularly pronounced in the U.S., the EU and Canada, where traditional exchanges compete for order flow with OTC trading and non-exchange market trading systems. In making its recommendations, IOSCO cautioned that regulators must balance the benefits of market structures that promote competition against the costs that market fragmentation can impose on market integrity, efficiency, price formation, and best execution. IOSCO's specific recommendations are highlighted below.
- Regulators should regularly monitor the impact of fragmentation on market integrity and efficiency across different trading spaces to ensure that the applicable regulator requirements assure market integrity and efficiency.
- Where trading is fragmented, regulators should seek to ensure that proper arrangements are in place to facilitate the consolidation and dissemination of trading information as close to real time as is reasonably practicable.
- Where markets are fragmented, regulators should consider how fragmentation affects intermediaries' ability to comply with order handling rules, e.g., best execution.
- Regulators should also regularly monitor the impact of fragmentation on liquidity across trading spaces.
In addition, regulators should seek to ensure that applicable regulatory requirements provide for fair and reasonable access to significant sources of market liquidity on the exchange and non-exchange trading market system.
Lofchie Comment: As we noted in our recent memorandum on proposed Regulation SCI, the SEC's NMS Rules encourage fragmentation by requiring firms to execute trades by looking at the top price available on each exchange, rather than allowing executing firms to take account of factors other than price.
View Report in full here (links externally to IOSCO website).