Iosco Issues Market Structure Report

Terry Flanagan

The International Organization of Securities Commissions has published its final report on Regulatory Issues Raised by Changes in Market Structure, which makes four recommendations that seek to promote market liquidity and efficiency, price transparency, and investors´ execution quality in a fragmented environment.

The report identifies possible outstanding issues and risks posed by existing or developing market structures and it describes how these risks should be addressed. Finally, it recommends that regulators monitor the impact of fragmentation on market quality.

The report responds to a 2010 request from the G20 that IOSCO “develop recommendations to promote markets´ integrity and efficiency to mitigate the risks posed to the financial system by the latest technological developments.”

Previous analyses and recommendations by IOSCO in other related areas have been taken into account in this report. Specific reference is made to the 2011 Report on Regulatory Issues Raised by the Impact of Technological Changes on Market Integrity and Efficiency and the 2013 report on Technological Challenges to Effective Market Surveillance Issues and Regulatory Tools.

The report also updates the 2001 IOSCO report on Transparency and Market Fragmentation, to the extent that it provides an overview of the current state of market fragmentation and regulatory steps taken in various members’ jurisdictions since 2001. In this period, the market structure of most jurisdictions surveyed has evolved from a single (or few) trading space within the same jurisdiction to multiple trading spaces for the same financial instrument.

The report looks at the trading of equities and exchange-traded funds on the most common trading spaces identified in a survey of different jurisdictions, including exchange trading market systems, non-exchange trading market systems, and trading over the counter (trading that does not occur on an exchange or non-exchange market system). It does not include the trading of derivatives products.

The work carried out for the report included the following fact finding exercise:

• A mapping of the various types of trading spaces in different jurisdictions;
• An overview of the regulations and rules that apply to the various types of trading spaces and uand ultimately the factors that fostered the establishment of multiple trading spaces for the same product;
• An analysis of how liquidity has been dispersed among these different trading spaces in equities and Exchange Trade Funds (ETFs), and
• A dialogue with industry, including consultation with the relevant IOSCO committees.

This final report outlines the current state of play in market structures in most IOSCO jurisdictions, affirms the main findings and challenges identified through the 2012 survey and the 2013 public consultation. And it adopts as final the recommendations set forth in the March consultation report, and recommends that regulators should monitor the impact of fragmentation on the following: market integrity and efficiency; availability and timeliness of information; order handling rules and best execution; access to liquidity.

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