As equity trading evolves — including moves to extend trading hours in certain markets — the International Organization of Securities Commissions (IOSCO) is proposing a set of standards for guarding market quality and preserving investor protection.
The umbrella group of global regulators published a pair of reports — one that examines the experience of markets that have adopted extended trading hours, and another that reviews the evolving patterns of market liquidity, and consults on proposed best practices for facilitating fair and orderly equity markets amid shifting liquidity.
IOSCO is seeking feedback on the consultation paper, which analyzes how liquidity is distributed across the trading day, and examines existing approaches to supervising these markets.
Among other things, the report finds that trading activity is becoming increasingly concentrated at the market close, which supports price discovery and efficiency at the close, but can also introduce risks — such as weaker liquidity in the rest of the trading day, elevated volatility at the close and increased vulnerability to market manipulation.
At the same time, a separate report examines the shift to extended trading hours, including the adoption of overnight trading sessions and near-continuous trading in some markets. That report finds that the demand for extended trading hours is primarily coming from retail investors, and that these sessions are typically characterized by lower liquidity and wider trading spreads compared to the traditional trading day.
So far, regulators have largely relied on their existing regulatory frameworks to deal with extended sessions, rather than introducing bespoke regulatory regimes, it noted. And, trading venues have adopted controls to mitigate the risk posed by lower liquidity and increased execution risk.
“[O]perational capacity, staffing, post-trade processing and the transition to shorter settlement cycles have emerged as key practical considerations,” the report noted.
Feedback on the consultation paper is due by Aug. 21.
“[T]he consultation on the evolution of market liquidity during the trading day responds to the increasing concentration of trading at the close and seeks feedback on proposed good practices aimed at supporting fair, orderly and resilient markets,” said Martina Tambucci, chair of IOSCO’s committee on regulation of secondary markets, and head of the international relations unit at Commissione Nazionale per le Società e la Borsa, Italy.
“The consultation on intraday liquidity is a good opportunity for stakeholders to inform IOSCO’s consideration of whether existing regulatory and supervisory approaches remain fit for purpose as market practices continue to change,” added Jean-Paul Servais, IOSCO chair, in a release.