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WFE IOSCO response

Executive Summary
The World Federation of Exchanges (WFE) commends IOSCO for carefully analyzing the issues raised by
the growing and disruptive fragmentation and loss of visibility (darkness) in equity markets. The four
sensible recommendations in this consultation progress efforts on the part of regulators and exchange
operators worldwide to ensure that equity markets continue to serve investors by becoming ever more
efficient, transparent and fair.
The WFE supports competition and believes that regulators must promote market designs that foster
order interaction in a free, transparent and fair competitive environment. Unfortunately, regulations
intended to promote competition between and on-exchanges have in recent years been misused to
enable the growth of venues designed to avoid competition.
The WFE is concerned about the integrity and efficiency of fragmented, complex and dark markets,
particularly as it relates to price formation, surveillance, and market resiliency. Market participants are
increasingly discouraged from posting competing prices in lit venues, and evidence indicates that
spreads are wider than they could be otherwise. Similarly, diminishing transparency and fair access
leads to market complexity that makes markets less capable of handling volatility. Finally, the WFE is
concerned that a greater share of equities trading occurs away from full regulatory protection offered by
regulated exchanges.
The WFE calls into question two common practices in fragmented markets. First, retail and institutional
orders are systematically segmented toward venues designed to avoid quote competition, where
conflicts of interest are unavoidable. Second, fragmented markets increasingly allow participants to step
in front of displayed public limit orders on dark venues with little to no price improvement or block
trading. The incentive to segment markets and reduce transparency jeopardizes the price discovery
process and can adversely impact costs for all investors. .
The WFE calls attention to the problems that investors and security commissions face in receiving
reliable data from over-the-counter (OTC) equity trading venues. While the WFE believes that the
quality of data, and the costs associated with aggregating data should be weighed when changes to
market structure are considered, consistent transparency regulations across venues is fundamental to
efficient trading and market surveillance.
The WFE supports recent changes made by the security commissions of Canada and Australia in curbing
the excesses of OTC equity trading.

WFE IOSCO response

Monitoring the impact of fragmentation on market integrity and efficiency
Recommendation 1

1.1 Regulators should regularly monitor the impact of fragmentation on equities market integrity
and efficiency across different trading spaces and seek to ensure that the applicable regulatory
requirements are still appropriate to protect investors and ensure market integrity and
efficiency, including with regard to price formation, bearing in mind the different functions
that each trading space performs.

1.2 Regulators should regularly evaluate the regulatory requirements imposed on different
equities trading spaces and seek to ensure that they are consistent (but not necessarily
identical) across spaces that offer similar services for similar instruments.

1. Does the evolving market fragmentation challenge the relevance, effectiveness or implementation of
current regulatory requirements? If so, which ones and how are they impacted?
2. Are you aware of material differences in regulatory requirements between different trading spaces
that from your point of view are not justified and create regulatory risks and unfair competition? For
example, are there regulatory requirements that apply to one type of trading space in your jurisdiction
and currently do not apply to others but, in your view, should apply to others that offer similar services?
Please describe.
3. Do you think that the price formation process has been deteriorated or has been improved as the
result of market fragmentation? If so, please explain how.

WFE Response:
As more trading volume migrates from public, more regulated lit exchanges to private, less regulated,
dark venues, there is growing evidence of declining market quality that raises investor costs and
undermines public confidence and participation in capital markets. This is illustrated by the frequency of
media attention to once obscure market structure topics such as dark pools, high frequency trading, and
order types. These practices attract the fearful attention of the public - inevitable responses to a highly
fragmented, complex and obfuscated market.
This concern is shared by the buy-side as explained in Kevin Cronins (Global Head of Equity Trading,
Invesco, on behalf of the Investment Company Institute) testimony to the US House of Representatives:
We recognize that while the use of un-displayed liquidity brings certain benefits to funds, there are
concerns about its impact on the price discovery process. Ideally, funds would like as many orders as
WFE IOSCO response
possible to be executed in the lit markets. ICI therefore has strongly supported efforts to provide
incentives for market participants to use transparent orders. Until we create a more efficient market
structure for the execution of institutional sized orders, however, it is imperative that venues providing
un-displayed liquidity remain available to funds and that the regulations overseeing these venues
facilitate their continued use.
Inconsistent Rules Lead to Fractured Markets
In Europe, MIFID included different regulatory requirements for Regulated Markets (RMs) and
Multilateral Trading Facilities (MTFs) on the one hand and Broker Dealer Crossing Networks (BDCNs)
on the other. BDCNs are exchange-like trading platforms operated by investment banks offering trading
in equities. They provide similar services as RMs and MTFs but are not subject to regulatory
requirements for trading venues. Hence, activity on BDCNs falls into the category of over-the-counter
(OTC) trading. Those differences in regulatory approach are not justified and create regulatory risk as
the matching of orders is conducted away from transparent markets and is exempt from a competitive
price determination process. There is no guarantee that the orders are fairly priced. Additionally the
whole market is diminished because a growing proportion of order flow is excluded from the price
formation process.
Furthermore, those differences create unfair competition as BDCNs offer their services with
discriminatory access, meaning the owner determines who can access their platform. And because
trading occurs at the discretion of the owner conflicts of interest are unchecked.
As noted in the study MIFID, Spirit and Reality of a European Financial Markets Directive: The
development of Broker Dealer Crossing Networks (BDCNs) creates second class investors. While MiFID
has imposed non-discretionary access rules to the various regulated venues, BDCNs are allowed to
provide access to selected customers across the various market participant types (traditional buy side,
other sell side, hedge funds, etc.). Therefore, access to this liquidity pool is not set on a fair basis, and
some market participants that cannot afford, or do not wish, to become customers of the BCNs are very
likely to become second class investors unable to access the whole liquidity pool available in the market.
This situation is even more acute today since numerous BCNs are becoming linked to one another to
create a cloud of crossing networks that will deepen their pool of liquidity and increase the likelihood of

In the US, the regulatory landscape facilitates and encourages off-exchange trading by allowing OTC
venues to utilize different practices than exchanges, including the following:
Customer segmentation;
Ability to trade at the NBBO without quoting;
Ability to offer de-minimis, sub-penny price improvement;
No pre-trade, and limited post-trade, transparency;

MIFID, Spirit and Reality of a European Financial Markets Directive p 62 -63
WFE IOSCO response
Ability to send Indications of Interest (IOIs) to a select network of customers rather
than publishing them as quotes to the public;
Lack of affirmative regulatory obligations including the rulemaking process and publicly-
disclosed rules;
Less regulatory oversight of participants and cost;
Reduced transparency and higher profitability further incentivizes liquidity.

According to a report by Tabb Group, the discretionary latitude given to dark pools results in little
transparency into order placement logic, linkages, wait-times, routing priorities and how best execution
is measured at a particular point in time.
In addition they note that the majority of buy-side traders do not have the resources to actively
monitor dark activity or scrutinize every trade when trading using broker algorithms, and rely on broker
best-ex obligations, their own trading experience and transaction cost analysis reports.
The lack of transparency is at times detrimental to investors as illustrated by recent cases in the US
where confidential information is not protected
or trading by an affiliate is not disclosed

SEC Charges Boston-Based Dark Pool Operator for Failing to Protect Confidential Information, SEC press release
Alternative Trading System Agrees to Settle Charges That It Failed to Disclose Trading by an Affiliate, SEC press
release (2012)

WFE IOSCO response

Major differences between Exchanges and Off-Exchanges Dark
Pools in the US

Source: Tabb Group

The Tabb Group report continues: The quality of execution data is, however, skewed by the fact that
the earliest and easiest executions occur off-exchange, the least visible part of the market. By the time
executions occur on the lit market, information has leaked. The proprietary nature of dark platforms
requires a level of protection to safeguard innovation and competitive edge. Yet internalization raises
questions of fairness, if trading interest can be observed without commitment to trade, and indications
of interest create an exclusive network of activity.
Nominal price improvement is based on a benchmark that has itself been negatively affected by
segmenting retail order flow. As Larry Harris notes: dealers only pay for order flow that they believe
comes largely from uninformed trades (i.e. retail investors orders, which are part of the utilitarian
traders as opposed to informed traders and dealers). But the diversion of order flow from exchanges
decreases market quality at the exchanges by removing utilitarian order flow. This issue clearly relates
WFE IOSCO response
to price formation as markets that have many utilitarian traders tend to be liquid markets with
informationally efficient prices
A recent study particularly has demonstrated that higher levels of dark trading are associated with
decreased price discovery and less informationally efficient prices
. The authors also note that: order
flow that migrates to the dark is less informed than that which is left behind, but it is not entirely
uninformed. Therefore loss of pre-trade information on migrating order flow harms price discovery. It
also increases adverse selection risk, bid-ask spreads and price impact in the transparent exchange.
This report also concluded that the negative aspects OTC equity trading occur at much lower levels of
fragmentation as little as 10% of trading away from lit markets harms market quality. The Australian
Securities and Investments Commission (ASIC) published its findings in March 2013 confirming the
impact on spreads from OTC equity trading.

Number of US stocks with over 40% OTC equity

Source: CTA, UTP

Off-exchange equity trading has grown well beyond its intended purpose. Dark pools and other
alternative trading venues were originally intended to allow institutional investors to trade large blocks
of stock without negatively impacting the price of the security. From this useful, but narrow role, this
growing practice has morphed to the point where a majority of trading several thousand US equities
now takes place in the dark away from public exchanges.

Regulated Exchanges: Dynamic Agents of Economic Growth (2010)
Dark Trading and Price Discovery, Comerton-Forde and Putnins (2012)
Dark Liquidity and high-frequency trading, ASIC, pg 32-38
WFE IOSCO response
As OTC equity trading increases, spreads widen

Source: calculations based on CTA, UTP as of J anuary 2013

Fragmentation occurs when liquidity is not centralized but dispersed across numerous trading venues. If
the information of the order flow fractions cannot interact, the price determination process would be
severely harmed. In order to avoid this negative effect of fragmentation, a high level of transparency is
necessary. This can be achieved if the whole market applies the greatest level of pre- and post-trade
transparency. However, information about prices is in the public interest, which market participants
want to benefit from but have no incentive to contribute to as they intend to hide their own information
advantage. Hence, market participants want to benefit from the price determination of the market but
do not want to share their own information.
This is a dilemma which makes trading away from
transparent markets appealing.
However, MiFID deregulated price competition in European markets in 2007. A transparency regime was
introduced in order to overcome negative effects of fragmentation such as the deterioration of the price
formation process. In addition, waivers of pre-trade transparency were introduced in order to grant
execution variety. Those waivers are the large in scale waiver, the negotiated trade waiver, the
order management facility waiver and the reference price waiver. The latter waiver is of special
interest in this context, as its original purpose is to enable trading of big tickets without detrimental
market impact. On top of that, MiFID explicitly excluded the OTC equity trading space from its scope.
Therefore, in the contemporary European market, trading is fragmented between numerous venues,
such as MiFID regulated lit and dark markets (as operated by RMs and MTFs) and the unregulated OTC
equity space. Lit RMs and MTFs apply the transparency rules and dark RMs and MTFs apply the
aforementioned waivers. Hence, a certain portion of order flow is exempt from the price formation of
the lit market. Currently, the market share of European dark markets, which use the reference price
waiver, is below 10 percent but if Europe follows the global trend those venues will grow and price
formation will be severely harmed due to the fact that a big portion of information is exempt from the
price determination on the lit market. The US market where nearly 40% of trading is in the dark might

European Securities Markets Expert Group, Fact finding regarding the developments of certain aspects of pre-
trade transparency in equities under MiFID, report 27/07/2009
>4M 1-4M 500K-1M 100K-500K 50K-100K


Consol idated Average Daily Volume
Spread versus CADV
TRF <40%
TRF >40%
>4M 1-4M 500K-1M 100K-500K 50K-100K


Consol idated Average Daily Volume
5-minute Range versus CADV
TRF <40%
TRF >40%
WFE IOSCO response
serve as an example of how OTC equity trading can gain critical mass. Dark trading is very appealing as
market participants seek to insulate their trading from public market competition.
Finally, it is difficult to measure the deterioration of the price formation process. However, the
exemptions of order flowvolumes from dark trading and the OTC space decrease the amount of
information which forms part of the price determination of the market. As transparency is the best way
to avoid the negative effects of fragmentation the aim should be for the largest possible amount of
information to form part of the price determination process.

Regulators are Beginning to Take Action
Regulators around the world are taking the lead in improving market quality and confidence by
effectively addressing off-exchange trading by making sensible changes. In particular, Canada and
Australia implemented regulatory changes that require off-exchange venues to offer a minimum level of
price improvement before a trade can be executed. Requiring OTC equity trading to provide a material
and measurable benefit to their participants represents an appropriate regulatory recognition of the
benefits to investors and listed companies of price transparency and competition.
As noted in the 2001 IOSCO Report: if competition is working well, one would expect the benefits to be
manifesting themselves not solely in market share increases for successful service providers but also in
such indicators as rising market volumes and narrowing spreads
The opposite is happening as trading volumes have declined and a growing body of research shows that
market fragmentation onto dark markets has led to deterioration in the price formation process:

Internalization and Market Quality in a Fragmented Market Structure Weaver (2011)
Dark Pools, Internalization, and Equity Market Quality CFA Institute (2012)
The Impact of Dark Trading and Visible Fragmentation on Market Quality Degryse, de
Jong, and van Kervel (2011)
Dark Trading and Price Discovery Comerton-Forde and Putnins (2012)

WFE IOSCO response

Monitoring the impact of fragmentation on trade information
Recommendation 2: In an environment where equities trading is fragmented across multiple trading
spaces, regulators should seek to ensure that proper arrangements are in place in order to facilitate
the consolidation and dissemination of information as close to real time as it is technically possible
and reasonable.

1. What options are available to manage the issues associated with data fragmentation in a competitive
2. What conditions, if any, should govern access by investors to consolidated market data?
3. Are there other challenges (technical, regulatory, prohibitively high costs) with regard to creating
and/or accessing consolidated market data? What if anything, should be done to address these
4. What views do you have on the relative merits of a single consolidated tape mandated by the
regulation versus multiple competing tape providers? Please elaborate.

WFE response:

One of the most serious and expensive challenges of disorderly fragmentation is the necessity to
consolidate data to assure reliable market surveillance and execution quality measurement. The
Consolidated Audit Trail in the U.S illustrates how regulators and market participants must spend huge
sums of money to overcome fragmentation to enable effective surveillance. This cost is ultimately borne
by investors, calling into question whether the claimed benefits of unrestricted fragmentation could
exceed the direct cost of regulation.
There is no one size fits all solution for effective market data distribution and consolidation. But it is
fundamental that investors have equal access to visibility into the venues where price formation is
happening. Assuring the widest possible access to data often requires offering different price levels that
depend on a customer type and the intensity of their usage, but principles of fair access must prevail.
Data consolidation can be done in a variety of ways as long as the data is publicly available and uses
consistent standards. Even before the introduction of MiFID I the German market had been fragmented
and data was consolidated without problems (and no Central Tapes). With the introduction of MiFID,
OTC equity data had to be published as well. However, any consolidated views on a combined data set
of trading venues data with OTC data in the EU has failed to come up with usable solution. The reason
behind this is that OTC market data tends to be a) unreliable in terms of published overall volume and b)
WFE IOSCO response
subject to significant time delays compared to trading venues data. The mix of data of different quality
therefore impacts the potential value of a consolidated view.
In order to improve the quality of OTC data and in order to facilitate easy consolidation a set of
necessary pre-requisites (e.g. standards, harmonized trade reporting requirements, compliance
enforcements) needs to be established and introduced to enable any sort of consolidation, be it via a
centralized plan (U.S. style) or be it decentralized, within the spirit of MiFID.
Within Europe the introduction of Approved Publication Arrangements will certainly improve the quality
of OTC data. Clear reporting publication rules, however, especially in case of trades across national
jurisdiction, will need to be implemented as well, in order to improve the reliability of OTC trade
reporting going forward.
Furthermore, any significant deviation to real-time publication (e.g. publication delays allowed by MiFID)
will in fact reduce the usefulness of a real-time consolidated tape. Therefore, any publication delays
should be reduced to a minimum.

WFE IOSCO response

Monitoring the impact of fragmentation on order handling rules and best execution
Recommendation 3

Where equity markets are fragmented, regulators should consider the potential impact of
fragmentation on the ability of intermediaries to comply with applicable order handling rules
including, where relevant, best execution obligations, and take the necessary steps.

1. Should existing order handling rules, such as best execution, be re-examined in the context of
fragmented markets? If so, in what way?
2. Do you think that rules relating to the disclosure of order handling practices by investment firms are
appropriate to facilitate compliance with and evaluation of best execution?
3. Are there any other appropriate order handling tools that should be considered in the context of
fragmented markets?

WFE response:

The fundamental problem in evaluating order handling and execution quality is finding an appropriate
benchmark. The competitively determined best bid and offer is a crucial benchmark for all investors but
its quality depends on aggressive and visible quote competition. Fragmentation in recent years has been
dominated by venues designed to reduce quote competition, leaving a diminishing amount of activity
competing in transparent markets. Diminishing competition can only lead to one outcome: a lower
quality benchmark than what would otherwise be possible.
In some regions the problem is compounded because there is not effective post-trade transparency
for OTC equity trades. OTC equity data is not standardized, which in turn reduces the information
content of OTC-reported prices significantly. This makes a direct comparison or traceability of best
execution results difficult. Better OTC data quality is necessary, as this will enable clients to
compare the best execution efforts of their banks/brokers.

In addition to the decline in the national best bid and offer (NBBO) and last sale benchmarks, off
exchange trading can have a direct and difficult to measure impact on execution quality. As discussed by
Professor Larry Harris, in the case of internalization (and fragmentation more generally) the immediate
incentives to obtain best execution for their orders are small. Elaborating on this idea, Professor Harris
notes that in principle, these problems would not arise if clients could easily determine whether their
brokers were obtaining best execution for their orders. But, in practice, brokerage clients, and
WFE IOSCO response
especially retail clientscannot easily determine whether the prices that their brokers obtain for their
orders are as good as they could have obtained. To do so, they must know what market conditions
prevailed when they submitted their orders, and they must compare their execution prices to the prices
that they would have expected to receive, given those market conditions.
This process is very data intensive, and reliable results require analytic modeling skills that are
substantially beyond the expertise of most clients. At best, retail clients only have a weak sense of
whether their executions occur at favorable prices, and then only to the extent that their execution
prices are at or within the bid/ask prices that their brokers may or may not present to them, and even
then, only if the clients are paying attention. In contrast, institutional clients generally employ
consultants to analyze the executions of their orders.

Conflicts of interest are therefore apparent in motivation for intermediaries to trade on OTC equity
venues. The next question is the extent to which this is common. A recent CFA Institute study highlights
the fact that almost 100% of retail market orders are internalized
. This segmentation of order flow
raises fundamental question as noted in IOSCO Transparency and Market Fragmentation report
It would appear to be a difficult task to create rules that would reassure investors that their trades are
being properly executed in the current environment. A rule for meaningful price improvement would
simplify the task. Another improvement would be to place more disclosure between intermediaries and
their clients on the decision process that the broker uses for executing trades, and make client consent
more explicit. If more information were obligatory, the competition between intermediaries to be seen
as providing a better service may be a useful tool in restoring market integrity.

Larry Harris, op. cit., our emphasis
Dark Pools, Internalization, and Equity Market Quality, CFA Institute (2012), p. 17
Celent Pages 9-10, 22.
WFE IOSCO response

Monitoring the impact of fragmentation on access to liquidity
Recommendation 4

Regulators should regularly monitor the impact of fragmentation on liquidity across trading spaces.
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 systems.

1. Do you have views on regulatory mechanisms and specific arrangements that might be needed to
help ensure that investors have an appropriate, fair and reasonable access to liquidity in both exchange
and non-exchange trading market systems? If yes, please elaborate.
2. Are there any other issues resulting from the market fragmentation that should be addressed with
respect to access to liquidity on exchange and non-exchange trading market systems?

WFE response:
In its 2001 report, the IOSCO Technical Committee noted that the principal source of competition
between trading venues was either order-matching systems competing with traditional quote-
driven/dealer markets or trading systems designed to remove market impact for block orders.
Today, looking at OTC equity trading venues operating () in most jurisdictions, very few are actually
transacting block orders, instead presenting similar features to traditional quote-driven/dealer markets
(lack of transparency, discretionary rules). This outcome does not fit with the initial purpose of
introducing more competition among trading venues.
The OTC markets have been able to replicate with new technology some of the characteristics that once
marked floor trading at stock exchanges. Some of these features of how orders are handled were
banned on exchanges years ago, in some cases because of intrinsic conflicts of interest, so that
price/time priority became the standard for fairness on central limit order books.
As noted in the study MIFID, Spirit and Reality of a European Financial Markets Directive: Reliance on
OTC equity market operations should be closely supervised. The current level of equity transactions that
are conducted OTC pose a real threat to the order-driven model of the European cash equity market.
The situation is even more acute with the development of BDCNs that could capture more market share
from the regulated trading venues (regulated markets, MTFs,and systematic internalizers (SI). With
negotiation happening in the OTC space, the price discovery mechanism happening on the lit market
WFE IOSCO response
could be severely impacted, pushing the equity market to become a quote-driven market very similar to
the structure in place in commoditized OTC asset classes that are the fixed income and spot FX
In the contemporary fragmented European equity market, it is of major importance to ensure that
market participants have equal access to overall liquidity. Equal access is not required for the non-
exchange trading market systems such as BCNs. In order to cover for the BCN issue, MiFID II
envisages the Other Trading Facility (OTF) category. Currently, it is not intended to require equal
access to those trading systems. In order to ensure a well-functioning European market it should be
guaranteed that all market participants are treated equally and in a non-discriminatory manner,
which in turn ensures equal trading opportunities to the overall market. Therefore, the OTF
category should be required to offer non-discriminatory access.

However in the cash equity markets, regulatory incentives are still skewed in the opposite direction in
several major jurisdictions, allowing powerful economic incentives to drive trading towards OTC equity
The minimal initial first step would be to disclose accurate and reliable volumes transacted on all trading
venues competing to attract orders. As already highlighted, the mere existence of non-transparent
venues applying discretionary rules raises significant issues regarding the extent to which their supposed
liquidity can be accessed. As quoted above, TABB Group raised serious concerns in reference to
internalization if trading interest can be observed without commitment to trade, and indications of
interest create an exclusive network of activity.
Several studies have raised the point that OTC equity trading has a detrimental effect on liquidity
measures resulting in higher spreads and lower depth. Degryse, de Jong, and van Kervel (2013) posit
that the negative impact of dark trading is consistent with a cream-skimming effect between dark and
visible markets.
In the European fragmented market it should be ensured that the same access requirements apply
to exchange and exchange-like trading systems such as MTFs. MiFID stipulates a set of criteria for
the regulated markets admission of members. MTFs have the ability to choose the clients they
accept. Regulated markets and MTFs should be ruled similarly in this regard, and discriminatory
access should be abolished.

The impact of dark and visible fragmentation on market quality (2013)
WFE IOSCO response

Monitoring the impact of fragmentation on market efficiency and resilience
Recommendations from October 2011 IOSCO report on Regulatory Issues Raised by the Impact of
Technological Changes on Market Integrity and Efficiency:

Recommendation 4: Regulators should continue to assess the impact on market integrity and
efficiency of technological developments and market structure changes, including algorithmic and
high frequency trading. Based on this, regulators should seek to ensure that suitable measures are
taken to mitigate any related risks to market integrity and efficiency, including any risks to price
formation or to the resiliency and stability of markets, to which such developments give rise and,

Recommendation 5: Market authorities should monitor for novel forms or variations of market
abuse that may arise as a result of technological developments and take action as necessary. They
should also review their arrangements (including cross-border information sharing arrangements) and
capabilities for the continuous monitoring of trading (including transactions, orders entered or orders
cancelled) to help ensure that they remain effective.

1. Are there any regulatory requirements that should be examined in addition to the recommendations
already made in the above mentioned IOSCO reports in light of the evolution of market structure and
trading strategies in the very specific context of market fragmentation? If so, please describe.
2. Are there any other issues associated with the fragmentation of markets that have not been
mentioned in the current report?
3. Are there any changes to regulatory structure that you would recommend to regulators in your
jurisdiction to address issues raised by market fragmentation? If yes, please elaborate.

WFE response:
As noted by Andrew G. Haldane
, past a certain point, the more complex a system is the less stable it is.
The 2010 flash crash and other examples illustrate the difficulties presented by equity market
complexity in some jurisdictions. As noted by TABB Group: the inability to determine what is happening
in the marketplace results from an increasingly complex ecosystem, including greater dark trading and

Rethinking the Financial Network (2009)
WFE IOSCO response
The current level of equity market fragmentation in certain jurisdiction has led to an unprecedentedly
complex market structure which has eroded public confidence in markets. The various examples noted
above demonstrate this fact and as summed up by TABB Group market structure confidence in the US
is low, one-third of US equity trading is executed on a non-exchange venue, and the makeup of this
volume lacks transparency.
The negative impact of fragmentation on primary markets is all the more serious because of the
deterioration of market quality for the market overall. As the quality of secondary markets declines,
especially as many stocks suffer from lack of visible liquidity and the overall market confidence is
negatively impacted by fragmentation, it increases the cost of capital and affects negatively primary
markets (listing and raising capital for companies).

The World Federation of Exchanges is the trade association for the operators of regulated financial
exchanges. With 58 members from around the globe, the WFE develops and promotes standards in
markets, supporting reform in the regulation of OTC derivatives markets, international cooperation and
coordination among regulators. WFE exchanges are home to more than 46,000 listed companies.

For more information on this paper contact:
Peter Clifford, Chief Operating Officer,
Romain Devai, Research and Project Manager,