FESE response to ESMA Call for Evidence on the market structure of European equity markets

The Federation of European Securities Exchanges (FESE) welcomes ESMA's Call for Evidence on the market structure of European equity markets and supports the objective to develop a comprehensive evidence-based assessment of the equity market structure trends and functioning. While European equity market has become more innovative and competitive, we believe that structural trends warrant closer scrutiny, particularly the continued migration of trading activity away from transparent multilateral markets towards bilateral and less transparent execution mechanisms.

A growing imbalance in the market structure

ESMA identifies a gradual shift of trading activity away from continuous lit trading towards less transparent and/or accessible execution mechanisms. While alternative execution models play an important role in meeting specific trading needs, an increasing proportion of trading now relies on prices formed on regulated markets and multilateral trading facilities without contributing directly to the price discovery process itself.

Robust price formation is central to healthy capital markets. Transparent multilateral markets provide the benchmark prices upon which many other execution mechanisms rely. Preserving the integrity of this process is therefore essential not only for secondary market efficiency, but also for investor confidence, capital formation, and the competitiveness of EU primary markets.

Against this backdrop, and building on ESMA's analysis, greater attention should be paid to how different execution models contribute to price formation and to the implications of evolving market structures for the quality, efficiency and resilience of the price discovery process over time. A continued shift away from transparent price-forming venues could weaken visible liquidity, reduce transparency, and affect the long-term attractiveness of European capital markets.

Systematic Internalisers: the need for a more balanced framework

The rapid growth of Systematic Internalisers (SIs) is one of the most significant developments observed in European equity markets. Their expansion appears to have been facilitated by regulatory asymmetries between SIs and trading venues.

Differences in transparency requirements, tick-size rules, execution flexibility, supervision, and reporting obligations can create competitive distortions that favour bilateral execution models regardless of execution quality. In parallel, a growing share of smaller trades appears to be internalised, raising concerns about liquidity fragmentation, investor protection, and the erosion of price formation.

Targeted measures to strengthen transparency, supervisory oversight, and reporting quality in the SI environment could help ensure a more balanced coexistence between bilateral and multilateral trading models, while preserving their legitimate role in facilitating larger and bespoke transactions.

Better data quality in the off-exchange space is essential

A recurring theme in the ESMA call for evidence is the need for more reliable and consistent data quality by systematic internalisers and the off-exchange space. Existing deficiencies in transaction reporting and trade flagging limit the ability of supervisors and market participants to assess execution quality, market dynamics, and the true extent of bilateral trading.

Improving reporting quality, strengthening supervisory enforcement, enhancing post-trade transparency, and introducing additional identifiers and flags are therefore a crucial starting point to contribute to a more accurate understanding of market developments.

A more complete view of European equity trading

A significant portion of trading in EEA shares takes place outside the EU, particularly in the UK. The exclusion of UK activity from the ESMA market structure analysis underestimates the scale of bilateral and off-venue trading and provides only a partial picture of liquidity and competitive dynamics.

Enhanced cooperation and data-sharing arrangements between ESMA and the UK FCA would support a more comprehensive assessment of fragmentation, liquidity and execution trends across interconnected European markets.

Closing auctions continue to serve an important market function

Consistent with ESMA's observations, closing auctions remain a critical component of European equity markets due to their role in liquidity concentration and end-of-day price formation. Their increasing significance largely reflects investor demand and the growth of index-based investment strategies.

Current evidence suggests that competitive dynamics in this segment remain strong, with no need for market intervention, and market developments should continue to be monitored through regular analysis.

Key policy priorities

To support strong, transparent and competitive European equity markets, FESE's response encourages ESMA and policymakers to:

• Reinforce transparency, market oversight and evidence-based policymaking through higher-quality data, more consistent reporting, and greater visibility of systematic internalisers' activity.
• Address regulatory asymmetries across execution models to ensure fair and balanced competition, conducive to a greater level playing field.
• Strengthen price formation, market integrity and execution quality through well-calibrated transparency requirements, meaningful price improvement mechanisms, robust quoting practices, and appropriate incentives for transparent liquidity provision.
• Improve the analytical coverage of trading activity in EEA shares across jurisdictions, and continuing regular monitoring of market structure developments to support informed policy decisions, including a detailed analysis of the contribution of various trading models to the price formation process.

Conclusion

The continued migration of trading activity away from lit multilateral venues raises important questions about the long-term sustainability of the EU market structure. FESE believes that targeted and proportionate reforms can help strengthen transparency, reinforce the price formation process, and support the broader goals of the Savings and Investments Union by ensuring that European capital markets remain attractive, liquid, resilient, and capable of supporting economic growth and capital formation.

Find out more about FESE's work on market structure here.