Factual Landscapes
The factual landscapes of the “financial markets” in the United States and the European Union are necessary to describe to understand parallel legal developments and to avoid getting mired in highly technical jargon in assessment of the rules within each jurisdiction. Since the United States experience preceded that of the European Union it is the logical starting point.
“In 1975, after active and far reaching hearings on the nation’s securities markets, Congress adopted significant amendments to the Securities and Exchange act of 1934.” (Dale A. Oesterle, Regulation NMS: Has the SEC Exceeded Its Congressional Mandate to Facilitate a “National Market System” in Securities Trading?, 1 N.Y.U. J. L. & Bus. 613 (2005)) Congress mandated the SEC to create a “national market system” for the trading of securities, to respond to structural changes in the financial markets, and to rectify market failures. The concept of the “NMS” parallels the ambition of MiFID to create a single internal market in financial services. The SEC relies upon its mandate under NMS to promulgate rules to achieve its objectives. NMS encompasses the stocks of more than 5000 listed companies collectively representing more than $14 trillion in U.S. market capitalisation (Regulation NMS, 17 CFR Parts 200, 201, 230,240, 242, 249, and 270 at 6 (2005)).
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Factually, there are ten registered securities exchanges in the United States, and nine of the ten have adopted new equity trading systems. Most notably, the New York stock Exchange (NYSE), the largest equity market in the world, has fully automated its quote for the first time in its history” (Daniel M. Gray, Securities Market structure and Regulation, What Does the Future Hold?, 1 Brook. J. Corp. Fin. & Com. L. 395 (2007)). All exchanges have brought new trading systems into operation as of March 5, 2007. In addition to the ten registered exchanges, a variety of alternative trading systems (ATS) compete for trading volume in the United States. The NYSE has merged with the fully automated Archipelago Exchange, originally an electronic communication network [ECN], and the NYSE has acquired “Euronext” (“NYSE Euronext, the holding company created by the combination of NYSE Group, Inc. and Euronext N.V., was launched on April 4, 2007. NYSE Euronext (NYSE/New York and Euronext/Paris: NYX) operates the world ‘ s largest and most liquid exchange group and offers the most diverse array of financial products and services. NYSE Euronext, which brings together six cash equities exchanges in five countries and six derivatives exchanges, is a world leader for listings, trading in cash equities, equity and interest rate derivatives, bonds and the distribution of market data.” Overview taken from http://www.nyse.com/about/1088808971270.html) NASDAQ, an approved exchange, has merged with two competitor ECNs, and has integrated the respective three trading systems into a single system. In addition, NASDAQ has acquired OMX Group, now called NASDAQ OMX. Three electronic communication networks publicly display their quotes through the National Association of Securities Dealers’ Alternative Display Facility, and a large number of other ATSs operate “dark” pools of liquidity.
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“These dark ATSs include crossing systems that facilitate block trading by institutional investors, as well as liquidity pools operated by broker-dealers that seek to match orders internally prior to any interaction with the transparent, public markets” (Ibid. at 399) Consequently, the NMS is a composite of multiple structures and systems presenting on a larger scale, though with substantial differences, the outlines of the European landscape in securities.
The European Union had 15 National stock exchanges and several regional exchanges, more than 20 derivatives markets, no centre for bond trading, 23 securities settlement systems, and 13 retail payment systems (Barbara Allemani, Giuseppe Lusignani and Marco Onado, The European Securities Industry: Further Evidence on the Roadmap to Integration, in Investor Protection in Europe (ed. Ferrarini and Wymeersch 199, 216 (2006) (observing, by contrast, that the US has 2 large payment systems, 3 securities settlement systems, and 3 retail payment systems). Since monetary union, the “number of post-trading organisations and exchanges has decreased”, but the EU is far from having a consolidated Pan-European market in securities with substantial cross-border trading. The current landscape is represented as follows:
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The chart demonstrates that there are four active areas in the European Union securities market: the London Stock Exchange, NYSE Euronext, Deutsche Borse, and OMX [renamed NASDAQ OMX]. It also identifies the major clearing centres: Euroclear and Clearstream, and the markets where derivative products are traded. The following chart shows third-party ownership of the exchanges and clearing systems. Noteworthy is the ownership of VIRT-X by Switzerland. Although the markets are fragmented, raising identical problems found in the United States, and raising similar issues of investor protection, it calls into question to what extent this framework can be called “European” and not international.
The various centres are not integrated, exhibit extremely different characteristics, and mainly have a domestic focus. For example, the Deutsche Borse AG operates the Frankfurt Exchange (FX), the largest of the German exchanges. FX uses an electronic trading platform called XETRA on which most of its shares are traded. However, approximately 30% of trades are executed off the exchange, the results being reported to BAFin. In addition, Germany has seven regional exchanges that compete with the Frankfurt Exchange, but none of the exchanges are linked to share data and permit access. German law does not even require tan an order be sent to an exchange offering the best price. The Dusseldorf Stock Exchange has 40% ownership stake in Quotrix AG that operates two ECNs. Take the London Stock Exchange as a second example. The LSE operates an electronic book order system know as SETS. It also operates a second tier market – AIM – that is a sub-sector of the national exchange. To promote cross-border trading, in 2004 the LSE launched the Dutch Trading Service allowing LSE clients the option to trade Dutch securities on the SETS order book. In addition, internalisation is widespread in the United Kingdom. The larger retail brokerage houses, operate Retail Service Providers to which they route client orders that are matched against corresponding orders. The post-trade transaction is reported to the exchange. Other markets such as Spain and Italy exhibit a central market mentality relying upon the concentration principle found in the Investment Services Directive.
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Having established a factual background, the US experience in the areas of “best execution”, “transparency”, and “linkages” are examined and then appropriate comparisons to the MIFID approach is identified.
