Europe’s largest banks and trading firms are warning regulators that tighter limits on off-exchange equity trading could cut liquidity and reduce execution choice for investors. The Association for Financial Markets in Europe, whose members include Deutsche Bank, Credit Agricole, Santander, Citadel Securities, and Jane Street, argues there is no evidence that the decline in trading on traditional exchanges has already caused material damage to price formation.
The dispute comes as a smaller share of equity trading takes place during the day on public exchanges, while more volume shifts to closing auctions and off-exchange channels where prices are not always publicly displayed. Regulators see a structural risk here. Market participants see useful flexibility.
ESMA is focused on visible liquidity and benchmark pricing
In April, the European Securities and Markets Authority published a study on equity market structure and raised the possibility of legislative or regulatory action in response to the continued decline in exchange-based share trading. ESMA did not say the trend is automatically dangerous. Its concern is narrower and practical: if too much activity moves into less transparent or less accessible mechanisms, public exchanges may no longer show enough trading interest to generate reliable reference prices.
That matters well beyond exchanges themselves. Investors, funds, brokers, and listed companies all rely on benchmark prices that come from visible markets. If displayed order books become too thin, quoted prices may reflect only a limited slice of actual supply and demand.
Banks and market makers argue alternative execution improves outcomes
Banks and market makers say off-exchange trading can benefit investors when it allows large orders to be executed with less market impact or gives retail orders a better price than the one available on a public venue. These channels can also help market makers internalize order flow and support liquidity when displayed books are shallow.
Political support for tighter oversight is already building. Finance ministries from Europe’s 6 largest economies have proposed steps to curb the growth of trading inside investment banks and proprietary trading firms. The proposals include stronger transparency requirements and a rule that retail orders should only be executed away from public exchanges if the firm can offer a better price than the exchange market.
AFME says any future action should be evidence-based and should not reduce investor choice without proof of market harm. Peter Tomlinson, head of equities trading at AFME, said: “Both Brussels and London are focused on making markets more globally competitive and simplifying regulation. Adding more rules or restricting how and where investors trade is unlikely to support those goals.”
The next fight is whether regulators can prove real damage
The next phase of the debate is likely to turn on one issue: whether regulators can show that lower exchange trading has materially weakened price discovery. For exchanges, the answer is critical because their role as the main venue for price setting is under pressure. If regulators conclude that too much visible liquidity has left public markets, new rules could push more trading back onto displayed venues or make internalization more expensive.
For banks, brokers, and proprietary trading firms, tougher transparency standards or stricter conditions for handling retail orders could reshape execution economics. It would affect routing decisions, market-making models, and the value of internal execution systems. The policy divide is clear: regulators want stronger public pricing, while market participants want flexibility, speed, and lower execution costs.