Carrot and Stick – The EU's Response to New Securities Trading Systems

Major developments like globalisation, technological progress and institutionalisation have influenced and changed today's world. In capital markets they have stirred the emergence of new securities trading systems called ATS which offer investors platforms to trade securities. These new systems provided considerable challenges for regulators. The major concerns raised in connection with ATS were that their existence led to market fragmentation, that transparency was impaired, that access to the systems could either be unfairly denied or be granted too easily, that they could facilitate market abuses, and that their stability could be an issue.In the European Union provisions for ATS were developed step by step until in 2004 the EU enacted the new Directive on Markets in Financial Instruments (MiFID) which contains a complex and detailed regulation of multilateral and bilateral ATS. By introducing the operation of a multilateral trading facility (MTF) as an investment service the EU acknowledged the existence and benefits of multilateral ATS. The rules for MTF resemble those for regulated markets – the category for traditional stock exchanges. However, they are more flexible and less detailed leaving more room for self-regulation. By introducing rules for so called systematic internalisers the EU also allowed the establishment of bilateral ATS. However, the provisions for systematic internalisers are much stricter than those for MTF and will likely stifle their development.