European banks urge regulators not to intervene in equity markets

• ESMA raised concerns in April that declining on-exchange equity trading could indicate growing reliance on less transparent mechanisms, potentially weakening price discovery and benchmark reliability
• Europe's six largest economies proposed requiring banks and trading firms to quote prices publicly and only handle retail orders if they offer better prices than public exchanges
• AFME, representing major banks like Deutsche Bank and trading firms like Citadel Securities, argues there is no evidence that off-exchange trading has harmed price-setting and warns new restrictions could backfire

Summary:

Europe's largest banks are pushing back against potential regulatory intervention in equity markets, arguing there is insufficient evidence that declining traditional stock exchange trading has damaged price discovery. The Association for Financial Markets in Europe (AFME), representing major institutions including Deutsche Bank, Credit Agricole, Santander, Citadel Securities, and Jane Street, issued the warning on June 30.

The dispute centers on concerns raised by the European Securities and Markets Authority (ESMA) in April regarding the continued decline in on-exchange equity trading. ESMA's study highlighted that persistent migration to off-exchange venues could increase reliance on less transparent trading mechanisms, potentially weakening price-setting reliability and benchmark accuracy for investors.

In response, Europe's six largest economies have called for curbs on trading within investment banks and proprietary trading firms. Their finance ministries proposed requiring these entities to handle retail orders only when offering better prices than public exchanges, aiming to level the competitive playing field.

AFME countered that tightening off-exchange trading rules could backfire, damaging market liquidity and harming investors. Peter Tomlinson, AFME's head of equities trading, emphasized that both Brussels and London are focused on enhancing global competitiveness and simplifying regulation. He argued that adding restrictions on where and how investors trade would undermine these objectives.

The banking industry maintains that any regulatory action should be evidence-based and warns against reducing investor choice in trade execution venues. The debate reflects broader tensions between ensuring market transparency and maintaining flexibility in evolving trading ecosystems.

Market Implications: Potential regulatory changes could significantly impact trading firms' business models and market liquidity structures across European equity markets.