Central limit order books (CLOBs) play a key role in ensuring effective price formation in equity markets in the UK and elsewhere around the world. Increased competition in execution services have brought benefits, namely reduced execution costs and innovation. However, the decline in CLOB usage poses a structural risk to market transparency, liquidity, and price discovery.
CLOBs ensure that all trading interests are publicly displayed and interact in a single, integrated order book accessible to all market participants. This structure facilitates genuine price discovery, as it reflects the full spectrum of supply and demand in real time. The resulting price is not only transparent but also represents the most accurate and consensus-driven valuation of an asset, having incorporated and matched all expressed trading intentions in a fair and non-discretionary manner.
Multilateral venues provide unmatched pre- and post-trade transparency, non-discriminatory access, and strong investor protections. These characteristics are foundational to reliable price formation and support broader market integrity. In contrast, the rise of bilateral trading mechanisms has introduced fragmentation and reduced the visibility of market activity, potentially weakening the overall market ecosystem.
To safeguard the role of CLOBs, policy and regulation must support their operators. This includes ensuring a level playing field between multilateral and bilateral venues, removing structural constraints that inhibit innovation, and enabling the provision of robust, transparent markets. Specific measures could include reinstating key execution data requirements, exposing retail trades to exchanges, and reassessing regulatory asymmetries that currently disadvantage exchanges.
Consultation Paper on the SI regime for bonds and derivatives
We recognise that permitting SIs to operate OTFs could enhance competition, particularly in non-equity markets, and may be manageable with appropriate safeguards. However, we do not support removing the ban on matched principal trading by MTFs, where the risks of conflicts of interest and information asymmetry are significantly more acute. A clear boundary between trading venues and participants remains essential to preserving market integrity and avoiding the erosion of trust in transparent, multilateral market structures.
