IOSCO Issues Two Studies - One Related to Market Structure and the Other Regarding Incentive Fees
IOSCO issued two studies on December 13, one related to regulatory issues raised by the evolution of market structure (other than derivatives markets), and the other regarding incentive fees provided by exchanges and other markets and their impact on trading behavior.
In connection with its report on market structure, IOSCO noted the benefits of increased competition because of the proliferation of different types of trading spaces - exchanges, non-exchange trading market systems (e.g., Automated Trading Systems in the U.S. and Multilateral Trading Facilities in Europe), and OTC trading systems - but observed that, as a result of this proliferation, fragmentation of markets is an increasing trend. This fragmentation raises a number of concerns, including:
"(1) the duplication of costs, including 'search,' operating; and regulatory costs; (2) the introduction of trading methods and business practices that may diminish efficiency and not be in the interests of the market as a whole; and (3) the dispersion of liquidity that could result in less efficient price formation and in higher volatility."
As a result, IOSCO issued recommendations that included the following: national regulators should (1) regularly monitor the impact of this fragmentation on market integrity and efficiency to ensure that regulatory requirements to protect investors and ensure market fairness are still appropriate, as well as (2) regularly evaluate different rules applicable to different trading spaces to assess comparability. Also, no matter where trading occurs, regulators should (1) seek to ensure that information regarding all trading activity is disseminated as close to real time as possible, and (2) consider the impact of market fragmentation in evaluating the ability of intermediaries to comply with order-handling rules such as best execution. The impact of fragmentation on liquidity also should be monitored regularly.
IOSCO's study on market structure was a follow-up to one prepared by the organization in 2001.
In connection with incentive fees, IOSCO pointed out the need to consider the potential of conflicts of interest in routing decisions because of multiple marketplaces charging different fees, and the potential for fees to "distort the markets . . . where trading is based on differential between fees and rebates rather the pricing of a security." However, IOSCO said that its study of incentive fees did not provide sufficient "clear evidence" to arrive at any definitive conclusions, and therefore did not issue recommendations as part of its effort.
See: IOSCO Final Report: Regulatory Issues Raised by Changes in Market Structure; IOSCO Final Report: Trading Fees and their Impact on Trading Behavior.This summary was provided by Gary DeWaal, President of Gary DeWaal Associates LLC.