Erik Thedéen
President, NASDAQ OMX Stockholm

A key lesson drawn from the financial crisis of 2008 is that market transparency is a crucial ingredient to  financial stability. Yet, according to European exchange statistics, close to 40% of European stock trading takes place on unregulated OTC (over-the-counter) markets. In the U.S., experts estimate that 25-35% of equities trading takes place on OTC markets.

These statistics highlight the fact that a vast amount of equity trading today occurs without public disclosure about buyers and sellers, liquidity or order size. While it was not the intended consequence of MiFID (Markets in Financial Instruments Directive), I would argue that transparency in the financial markets has diminished since the deregulation of exchanges in Europe started in 2007.
 

The main goal of MiFID was to increase transparency in stock trading within the European Union. Three markets for stocks were identified: Regulated markets (traditional exchanges), MTFs (alternative markets such as Chi-X), and Systematic Internalizers (SIs), where banks match transactions internally and then publish them externally. The purpose of including the Systematic Internalizers was to increase transparency in OTC trades, transactions between banks and brokers which traditionally lacked transparency, without forcing all transactions onto stock exchanges.
 

However, as the above statistics show, a considerable amount of stock trading occurs on the unregulated and more opaque OTC markets that reside outside the scope of MiFID. These markets, where banks often handle their own order matching, are in need of increased transparency. The financial crisis showed the merits of more open and public markets.
 

OTC trading satisfies legitimate demands. To avoid substantial effects in the market, it is sometimes more appropriate for larger orders to take place anonymously outside of an exchange environment. So, I am  not arguing that all trading must be done on an exchange. However, when as much as 40% of all European trading occurs outside the directive set forth by the EU, it is time to think about what more can be done to promote transparency.  

Paradoxically, while the equities markets are seemingly becoming less open and heading towards a structure that resembles the much criticized OTC markets, intense initiatives are being undertaken in both the European Union and the U.S. to regulate and increase transparency in the OTC markets for credit  derivatives. The driving force for these initiatives is, of course, the central role these instruments played in the 2008 financial crisis and the Lehman collapse.
 

We should not lose sight of the warning signals in the equities markets. Just as a badly maintained road can cause an accident, a flawed or outdated market structure can cause an expensive market breakdown. As an industry, we must remain vigilant and work together to promote transparency and stability in all financial markets.