The fact that regulation and technology have turned many capital Market areas upside down is not new. And if there was a measure of the degree of disruption in an industry, the segment of market operators would definitely rank high. Nicky Maan, CEO of Spectrum Markets, sheds light on the fragmentation into different types of trading venues, its historical evolution, and where he thinks the industry is heading.

A Glimpse into Stock Market History

The Amsterdam Stock Exchange, which began trading in 1612, is considered to be the first stock exchange in the sense of a trading venue on which dividend-bearing shares can be traded permanently. The first stock exchanges are probably much older, but since these were commodity exchanges, it is difficult to say when they first became stock exchanges in the proper sense, as opposed to markets or trade fairs.

Since then, exchanges have been established either as member organisations, mostly owned by the brokers trading there, or as state institutions. The change towards private and purely profit-oriented market operators, the shares of whom can be traded themselves, only began in the mid-1990s. There have been a number of investments, takeovers and spin-offs ever since, with increasing specialisation in the products and services that were once all brought together under the umbrella of one exchange per country or region.

The primary function of these exchanges remained trading operations, with transaction fees serving as a cornerstone of their revenue model. Market data and index businesses also gained prominence, reflecting advancements in technology and competition.

 The MiFID^[1]Revolution: Catalyst for Change

The turning point in the evolution of European financial markets came with Mifid I which formed a uniform European legal framework for the provision of investment services from brokerage to advice, trade execution, portfolio management and the issuance business. However, with the aim of promoting the integration, competitiveness and efficiency of the EU financial markets, the powers and responsibilities of national supervisory authorities was revised, too. Among other things, it was stipulated that member states can no longer require that all trading in financial instruments takes place on traditional stock exchanges. Until then, there was de-facto no European stock trading, shares of corporates were largely traded on the national market of the relevant corporate’s residence.

Of course, the directive also opened up the market for the EU-wide provision of other investment services, provided that sufficient organisational requirements were met. In conjunction with the introduction of MTFs^[2] and systematic internalisers, however, the abolition of the concentration rule was one of the most effective measures under MiFID I, as it significantly increased competition both between stock exchanges and over-the-counter execution places. However, this came with side effects undesirable from a European supervisory perspective.

MiFID II: Addressing Challenges and Complexity

The objectives of MiFID II, implemented eleven years after its predecessor, been to increase the efficiency, resilience and integrity of the financial markets through a higher degree of investor protection, greater transparency and more competition. Claiming similarly noble goals, MiFID I fell short of many of these. For example, the increased competition aimed at by MiFID I did not benefit all market participants equally. In addition, the market fragmentation caused by MiFID I had led to an increased complexity of the trading environment and the problems supervisory authorities had in collecting meaningful market and trading data weren’t appropriately addressed.

The combination of liquidity and own funds deficits, high derivative exposures and inadequate risk management – culminating the great financial crisis of 2008/2009 – ultimately paved the way for MiFID II. While certainly setting standards in terms of transparency and governance, even this massive regulatory overhaul couldn’t deliver on all of its goals. Moving as much order volume as possible to on-venue trading is one such target, MiFID II has missed so far.

Shifting Landscape: Exchanges and IPOs

For market operators, however, regulation is not the only challenge. The decline in both the number and volume of IPOs has not just impacted the earnings of banks operating in the ECM^[3] sector. Exchanges themselves have failed to attract other market segment. Particularly, small and medium-sized, growth-oriented companies are becoming increasingly reluctant to raise capital through IPOs. On the one hand, it is still relatively expensive for these companies to prepare for a public listing. On the other hand, investor demand for smaller stocks has fallen significantly, too. Retail investors, a target client group which is becoming more and more important for the industry, may choose today from countless alternatives to a participation in the primary market. Many of these alternatives – such as engaging passively in ETFs to name just one – have proven less risky, less pricey, and much more lucrative.

Navigating Change: Strategies for Trading Venues

That doesn’t mean, however, that regulation and technological progress wouldn’t have offered opportunities for market operators. As inorganic growth through mergers and takeovers has become increasingly difficult, regulatory changes such as those under EMIR[4] or the SFTR[5] were incubators for trade repositories or transaction reporting and publication services.

For smaller trading venues like Spectrum Markets in particular, specialisation has emerged as a strategic imperative as it has tailored its approach to cater to retail investors, offering products and conditions that align with this investor category. They provide liquidity 24 hours a day, five days a week and have eliminated transaction fees for affiliated brokers, thereby reducing costs for retail investors. This commitment to transparency, regulation, and a professional trading environment ensures that retail investors can enjoy a trading experience on par with institutional counterparts.

[1] Directive 2004/39/EG (MiFID I) referred to as Markets in Financial Instruments Directive and revised to Directive 2014/65/EU (MiFID II)

[2] Multilateral Trading Facility

[3] Equity Capital Markets

[4] Regulation (EU) No 648/2012, the European Markets Infrastructure Regulation

[5] Regulation (EU) 2015/2365, the Securities Financing Transactions Regulation

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