The World Federation of Exchanges urged the European Securities and Markets Authority to examine bilateral trading growth in European shares. The WFE warned that excessive activity away from transparent public markets could weaken price discovery, reduce confidence in valuations, and make public markets less attractive for companies seeking capital. The organization issued this warning in its response to ESMA's call for evidence on European equity market structure. Bilateral trading has continued to expand across Europe, the UK, and the United States while transparent multilateral markets remain the main source of price formation. The WFE's central concern is that bilateral trading relies on prices created elsewhere, usually on lit public markets — if more activity migrates away from those venues, the pool of trading that actually forms prices becomes smaller. This regulatory consultation raises a larger market structure question: how much trading can move away from exchanges before the market damages the price discovery it depends on.
Bilateral Trading Rose From 25% to 35% While Exchange Trading Declined
The WFE said it agrees with ESMA that trading on central limit order books has generally declined, dark trading has remained relatively stable, and bilateral trading has increased. The organization said this trend is visible not only in the EU, but also in the US and UK. The group pointed to data from a FESE and Oliver Wyman report showing how European equity trading changed between 2020 and 2025. The data shows bilateral trading rising from 25% to 35%, while primary exchange trading declined from 38% to 30%. Dark trading rose from 5% to 6%, MTF lit trading increased from 11% to 15%, and non-addressable trading declined from 21% to 14%.
| Trading Category | 2020 Share | 2025 Share | Change |
|---|---|---|---|
| Primary exchange | 38% | 30% | -8 percentage points |
| MTF lit | 11% | 15% | +4 percentage points |
| Bilateral | 25% | 35% | +10 percentage points |
| Dark | 5% | 6% | +1 percentage point |
| Non-addressable | 21% | 14% | -7 percentage points |
According to the WFE, bilateral trading does not meaningfully contribute to price formation because it relies on prices established in the lit market rather than generating transparent market prices itself. The WFE accepts that different trading mechanisms have legitimate uses — large institutional orders may need to be executed away from lit order books to reduce market impact, retail flow may be internalized by systematic internalisers, and closing mechanisms can help asset managers rebalance portfolios. The organization said the problem is not that alternative execution exists, but rather the scale of bilateral trading growth.
WFE Distinguishes Price-Forming Liquidity From Addressable Liquidity
The WFE criticized ESMA's use of the term "addressable liquidity." ESMA appears to treat addressable liquidity as trading that is available to investors. The WFE said that is misleading because liquidity can be addressable to some investors without being genuinely accessible to all market participants. Only multilateral trading venues, the WFE argued, operate under fair and non-discriminatory access rules. That makes exchange liquidity more openly accessible across the market than liquidity controlled by bilateral arrangements or internalisers.
| Concept | Meaning | WFE's Concern |
|---|---|---|
| Addressable liquidity | Liquidity that may theoretically be reached | May only be available to selected participants |
| Accessible liquidity | Liquidity available on fair and non-discriminatory terms | Best represented by multilateral venues |
| Price-forming liquidity | Liquidity that creates transparent market prices | Concentrated on lit order books and auctions |
The WFE also argued that ESMA's analysis is incomplete because it does not fully include UK trading in EEA shares. London remains a major equity trading hub. The WFE said it would expect a high proportion of EEA shares to trade through UK systematic internalisers, OTC channels, or off-book on-exchange activity. Without that information, ESMA cannot see the full scale of off-book and SI trading in European shares. The WFE suggested that ESMA pursue a data-sharing arrangement with UK authorities, particularly in the context of broader market infrastructure reform and possible ESMA supervision of regulated markets.
Systematic Internalisers Capture Retail Order Flow Without Contributing to Price Formation
The WFE devoted particular attention to systematic internalisers, or SIs. SIs are investment firms that execute client orders against their own books on an organized, frequent, and substantial basis. The WFE argued that the SI regime may have evolved beyond its original policy purpose. Instead of mainly supporting large institutional execution, SIs are increasingly capturing retail order flow. The WFE said this order flow can be valuable because it provides information about sentiment, trading patterns, and short-term directional demand.
The organization raised the question of whether SIs are competing with exchanges on an uneven playing field. Exchanges carry obligations around transparency, market surveillance, fair access, operational resilience, and price formation. SIs, by contrast, can internalize flow while relying on prices established by exchanges. ESMA's data, according to the WFE, appears to show only a surprisingly limited degree of price improvement from SIs. The WFE also flagged data quality problems, including trades executed without appropriate post-trade flags, making it harder for regulators and investors to assess execution outcomes.
WFE Recommends UK Data Inclusion and Retail Order Flag Requirements
The WFE suggested reintroducing qualitative and quantitative reporting requirements for bilateral liquidity. The organization also said there may be merit in a retail order flag to show where retail flow is going and whether investors are truly getting a good deal.
| Issue | WFE Position |
|---|---|
| UK data gap | ESMA should seek fuller data on UK trading in EEA shares |
| Bilateral trading growth | Further analysis is needed on effects on price discovery |
| Systematic internalisers | More transparency and identifiable venue information should be considered |
| Retail order flow | A retail order flag may help assess whether investors get good outcomes |
| Addressable liquidity | ESMA should distinguish addressable, accessible and price-forming liquidity |
| Closing auctions | They should remain central to end-of-day price formation |
Closing Auctions Contribute Directly to Price Formation
The WFE strongly defended closing auctions. According to the response, closing auctions are often more efficient for executing large trades because they concentrate liquidity at a single point in time, reducing market impact and execution risk. They also matter for European asset managers because closing prices are used for valuation, portfolio rebalancing, and index tracking. The WFE argued that closing auctions are different from other non-lit mechanisms because they contribute directly to price formation. By aggregating buy and sell interest transparently at the end of the day, they establish a widely recognized reference price. Alternative closing mechanisms offered by MTFs and SIs can be useful, the WFE said, but they should be treated as complementary rather than substitutes for exchange closing auctions.
The WFE also made an issuer-focused argument. The organization said liquidity is consistently linked with IPO frequency. A strong secondary market reduces the liquidity premium demanded by investors. If investors know they can resell shares at fair and transparent prices, they require less compensation for liquidity risk. That improves equity valuations and lowers financing costs.
FAQ
What did the WFE warn ESMA about regarding European equity trading?
The World Federation of Exchanges urged ESMA to examine the growth of bilateral trading in European shares, warning that excessive activity away from transparent public markets could weaken price discovery, reduce confidence in valuations, and make public markets less attractive for companies seeking capital.
How much has bilateral trading grown in European stocks between 2020 and 2025?
According to data from a FESE and Oliver Wyman report cited by the WFE, bilateral trading rose from 25% to 35% between 2020 and 2025, while primary exchange trading declined from 38% to 30%.
What is the WFE's main concern about systematic internalisers?
The WFE argued that systematic internalisers can internalize retail order flow while relying on prices established by exchanges, creating an uneven playing field where SIs benefit from exchange price formation without carrying the same obligations around transparency, market surveillance, fair access, and operational resilience that exchanges must meet.
