Competition among stock exchanges and trading platforms within a single European capital market

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Euronext's takeover of Borsa Italiana, the Italian stock exchange, is the latest major event in a fierce battle between European stock exchanges that started around twenty years ago. This fits in with a European vision of an arena in which stock exchanges and other platforms for the trade in shares and bonds compete with each other without harming liquidity or price-setting mechanisms. Under the European rules, however, this has only partly become reality.

Scrutinising the existing rules

European policymakers are reviewing regulations for stock exchanges and securities trading venues. The current Directive, MiFID II, has been in effect since 2018. One of its objectives is to ensure that as many shares and bonds are traded on the appropriate platforms rather than bilaterally ('over-the-counter'), and that securities traders are transparent about their securities orders.

Multiple platforms, a single market

In this way, the Directive is intended to promote a level playing field within a single, liquid European capital market. In such a liquid market, shares and bonds can be traded quickly, at low cost and at a fair price.

Competitive advantages – but at the risk of a fragmented trade

Competition between trading platforms means that a share or bond can be traded at multiple locations. This will help to reduce the costs of securities trading, while competition also promotes innovation with resulting advantages for investors. However, competition also has a number of potential disadvantages. In a fragmented securities trading market, buyers and sellers risk seeing only a part of that market where the same share may be offered at different prices and they may not have access to all the information that is available.

Improved transparency, but no centralised trade

Transparency about securities orders on the various venues will help to prevent this type of fragmentation. We may not be there yet, but MiFID II has clearly contributed to this objective. However, it has been less successful in enlarging the role of trading venues relative to that of the bilateral market. After all, the share of securities orders on trading platforms has not increased.

Next step

So while the existing rules represent a step forward, they have not yet resulted in the desired situation in which competing trading platforms combine into a single, transparent and liquid capital market in Europe. For that reason, we are closely monitoring developments in European policy in this field, and present our own proposals for share and bond trading in the process.

Brexit has further increased the relevance of these developments for the AFM's supervisory role. This is because several major trading platforms have opted to move from the UK to the Netherlands or to open a branch here.

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