Moves by European regulators to make equity trading more transparent could limit the access of smaller companies to capital markets.
If the EU’s Markets in Financial Instruments Directive II is applied in its current form, the SMEs could also be shut out of the private funding markets.
The latest MiFID proposals want to limit the ability of institutional investors to benefit from trading in “dark pools” of liquidity, where buy and sell positions are traded privately. Public disclosure of these trades would make it easier for other traders to bid the price of the stock down. As the stock of smaller businesses is generally less liquid than that of larger companies, they stand to be most affected.
Andrew Morgan, head of Deutsche Bank’s electronic trading business, Autobahn Equity Europe, said: “In relative terms, publicly trading a more liquid security will be less of a concern because your activity will be offset by other orders. The impact will be much bigger on something that doesn’t trade very much, like a small-cap issuer.“
Should investors begin to shun those stocks because of liquidity concerns, market participants fear there could be a knock-on effect in the primary market.
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