This study concentrates on the ongoing process to revise the Investment Services Directive (ISD) and the consequences of the repeal of Article 14(3) which allows national authorities to stipulate that retail investor orders be executed only on a “regulated market”. It examines the extent to which order flow is internalised in European financial markets and illustrates how internalisation practices differ across each of the major European financial centres and presents new empirical evidence of the possible effects of internalisation on price discovery.
In the absence of a concentration rule, trades may be executed away from the main market centre. Fragmentation occurs as orders are executed through preferencing arrangements and through in-house matching. This paper focuses on a specific type of preferencing - the internalisation of order flow.
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