World Federation of Exchanges publishes papers warning bilateral trading can undermine price formation and best execution

The World Federation of Exchanges (WFE) has published two papers warning that the shift toward bilateral trading can weaken liquidity, price formation and investor protection. To Serve and Protect and When is Liquidity? explain how headline trading volumes can overstate the liquidity investors can actually access, making it harder to determine the best execution price. The concerns echo the WFE’s July call for the European Securities and Markets Authority to examine bilateral trading’s impact on European equity markets. Multilateral exchanges bring participants together, reduce the cost of finding counterparties and provide transparent price discovery. Fragmentation, nonpublic bilateral trading and phantom liquidity can complicate market makers’ risk management, ultimately reducing available liquidity and weakening price formation. Policymakers should therefore focus on market depth on multilateral venues at a given point in time rather than total trading volume. The papers also argue that markets offering new trading methods or assets, including crypto, prediction markets and carbon credits, should demonstrate how they protect investors and meet the standards expected of regulated exchanges.