Innovation Competition Diversity for European Capital Markets
The Bond Market Association (TBMA)*, the Association of Private Client Investment Managers and Stockbrokers – European Association of Securities Dealers Futures and Options Association, the International Primary Market Association, the International Securities Market Association, the International Swaps and Derivatives Association, Inc., and the London Investment Banking Association (LIBA) publish this position paper: Innovation Competition Diversity Choice: A European Capital Market for the 21st Century.
*SIFMA is the product of a merger between the Securities Industry Association (SIA) and The Bond Market Association (TBMA) in 2006.
Excerpt
Executive Summary
An argument has been put forward, by one regulated market, that the way to preserve and improve the quality of Europe’s securities markets is to require all orders in securities to be routed to exchanges (regulated markets) for execution. This view of an efficient market bears no relation to today’s trading environment. It is a call for a return to the market monopolies of twenty years ago. It is not clear to what extent other regulated markets support this view but, in any case, we reject it.
If Europe adopts such a proposal, liquidity in its securities markets will be severely damaged, the overwhelming majority of investors will receive worse prices and the cost of capital for issuers will undoubtedly rise.
Twenty years ago Europe’s securities markets were small, illiquid and parochial. Today, spurred on by the EU’s efforts to remove barriers to cross border movement of goods, services and capital, and to promote competition, Europe’s securities market is healthier, more efficient and with higher trading volumes than was ever believed possible during the days of national protectionism. These hard won improvements must not be put in jeopardy.
Exchanges have participated in that process. Forced to compete for order flow amongst each other and with investment firms, they now offer an efficient market place for some investors, some of the time. When all investors have orders of similar size, when buyers and sellers are approximately equal and are closely grouped, price-wise, around the mid-price between the best bid and best offer and when investors have no need for immediacy, an exchange’s limit order book will be sufficient.