From the desk of Rachid Alaoui:

We are living in a period of profound change, driven in part by rapid technological advances and a shifting geopolitical environment that are transforming economies – creating significant opportunities for growth while also exposing markets that fail to adapt to the risk of lagging behind. Against this backdrop, the European Union (EU) has embarked on a well-timed, renewed focus to strengthen its capital markets and increase competitiveness and integration.

Strong capital markets help finance Europe’s growth and competitiveness. That includes investment in critical infrastructure and enables development of strategic capabilities at scale. Financial centres that are quick to adapt to change can mobilise capital more efficiently, are more resilient in times of stress, and are more likely to attract investment.

Late last year, the European Commission released proposed legislation – the Market Integration and Supervision Package (MISP) – to address this challenge head-on. The package is designed to make Europe’s capital markets more effective and efficient. MISP offers the opportunity to take a meaningful step toward building the capital markets Europe will need for the future and to translate that ambition into tangible benefits.

European equity market structure implications in MISP

Europe wants deeper, more competitive capital markets that attract investment and support growth. Achieving that goal requires markets that work for investors. When investors can access liquidity efficiently and choose the execution method that best meets their needs, they are more likely to participate in markets. That flexibility can support better investor outcomes, deeper liquidity and more resilient markets, helping make Europe's capital markets more attractive destinations for investment.

Some recent proposals in MISP to restrict off-exchange trading facilitated by investment firms – or more technically referred to as Systematic Internalisers (SIs) - would limit how and where investors can trade. While often framed as a technical market structure issue, the stakes are broader. Reforms that reduce execution flexibility risk making European markets less attractive at the very moment Europe is seeking to increase investment and competitiveness.

Europe’s ability to finance growth depends in part on whether investors see its markets as attractive places to put their capital. The aim should be to make good markets even better. European equity markets remain broadly resilient, liquidity is generally accessible, spreads remain tight. Policymakers should build on those strengths and focus reforms on improving investor outcomes rather than narrowing the range of available execution methods. The evidence does not support narrowing the range of execution methods available to investors.

Execution choice supports a clear chain of benefits for investors, capital markets and the broader economy. It allows investors to select the approach that best meets their needs, improving investor outcomes. Better investor outcomes encourage participation, which in turn supports deeper liquidity and more resilient markets. Over time, those characteristics help make capital markets more attractive destinations for investment.

The better path is to strengthen what is already working. Reforms should build on a trading landscape that is already highly diverse, puts investors in the driver's seat, and gives investors multiple routes to execute their trades aligned with their needs. Getting the balance wrong could make European markets more costly to use, less resilient during periods of stress and less attractive to global investors.

With this in mind, policymakers should consider the following principles as they shape the future of European equity markets:

Three principles to strengthen Europe’s equity markets

1. Focus on regulation that reflects trading diversity and improves investor outcomes

A retail investor placing a small order and a pension fund executing a large trade often have very different needs. Markets work best when investors can choose the execution method most appropriate for the transaction they are trying to complete. Execution needs differ by order size, urgency of execution, and the liquidity profile of the financial instrument being traded. Some orders require immediate risk transfer (e.g. large orders or those involving illiquid instruments), where off-exchange execution may be preferable; others can benefit from interacting with displayed liquidity on public exchanges over a longer time horizon. Restricting those choices may simplify the market on paper, but it can produce worse outcomes for the investors the market is meant to serve.

The market has also seen an increasing use of alternative trading destinations (e.g. periodic auctions and trading venues that have speed bumps to moderate execution speed) in addition to traditional on-exchange trading. These new ways of executing have been driven by execution objectives to minimise market impact and limit information leakage compared to executing such trades on a traditional exchange.

Investment firms and different trading venues each play an important, albeit distinct, role. There shouldn’t be a one-size-fits-all approach. The importance of investor choice has been emphasised by several prominent buy-side firms – a view also shared by our asset management business, J.P. Morgan Asset Management.

Variety in trading models is a feature – not a flaw – of European market structure. Markets are strongest when regulation accommodates different investor needs rather than steering all activity into a single trading model.

2. Preserve liquidity when markets need to most

Investors need confidence that they can buy or sell when they choose to participate in the market. That becomes especially important during periods of volatility or when liquidity is scarce.

SIs are a critical component to the proper functioning of the equity market in Europe and their role needs to continue to be recognised in the regulatory framework. SIs have long stepped up as shock absorbers, providing liquidity to their clients by using their own balance sheet to help investors when they want to trade but where there may not be an immediate natural buyer or seller. By standing between buyers and sellers and managing the associated risk over time, SIs can help investors access liquidity when they need it most.

Reducing the market’s ability to absorb risk could leave investors with fewer options precisely when liquidity is most valuable. Our experience suggests that SIs’ ability to absorb risk is particularly valuable for clients navigating markets during periods of heightened volatility and/or when liquidity can become scarce. It can also help reduce the total costs of trading for investors, contributing to more efficient European markets and keeping them resilient in good times and bad.

3. International experience offers a useful perspective

Europe’s competitors are not choosing between investor choice and market quality. They are pursuing both.

U.S. equity markets show that not all trading needs to occur on-exchange. Even with off-exchange activity accounting for approximately half of trading volume, U.S. equity markets remain deep and highly liquid, supported by a diverse set of trading models.

The U.S. model also highlights how innovation driven by competition across venues and execution types is a cornerstone of market competitiveness. That competitiveness has supported continued improvements in execution quality and investor access.

The UK also provides a constructive point of reference. UK equity markets are characterised by higher levels of SI activity compared to the EU. However, the Financial Conduct Authority (FCA) continues to believe that “UK equity markets remain liquid, resilient and efficient”. The FCA believes that the expansion of execution mechanisms means that “market participants now have greater choice over where to source and provide liquidity, and which execution mechanisms best suit their needs.” Going forward, the FCA has also recently signalled its intention to adopt a more evidence-led, data-driven approach to equity market structure, which we support.

The international experience suggests that diverse trading models and strong capital markets can coexist. Europe should be careful not to assume otherwise.

A constructive agenda: what EU equity market reforms should focus on

As Europe seeks to build upon and strengthen its equity markets, the principles above outline helpful guideposts in examining how best to do that.

If the objective is to strengthen Europe’s competitiveness and attract more investment, policymakers should focus on reforms that improve how investors access information, liquidity and markets. In the context of MISP, we believe these principles can lead to practical progress by:

• Implementing a comprehensive equities consolidated tape so that retail participants and institutional investors can have a single, usable view of addressable liquidity across the EU;
• Addressing rising equity market data prices as overly expensive market data from exchanges limits investors’ ability to access fundamental information needed to inform trading decisions; and
• Adopting an evidence-led approach to monitoring the health of equity markets with innovation at its core.

Prioritizing investor outcomes, competition, and evidence-based policymaking would help Europe strengthen and build capital markets that are not only more integrated, but also more resilient, innovative, and attractive to investors over the long term.

Europe needs more investment. Investors are drawn to markets that are liquid, resilient and efficient. Preserving investor choice helps make capital markets more attractive to investors by allowing them to access liquidity in ways that best meet their needs. As policymakers consider reforms, the objective should be to strengthen the qualities that make European capital markets attractive to investors and capable of supporting long-term growth.

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