Why are trade execution regulations so crucial to investment markets?

As an investor on the outside looking in, what seems to be an ongoing raft of trade execution regulations can often appear overly complicated and cumbersome. However, these guidelines and regulations are critical to the smooth running of investment markets for many different reasons.

 

Market integrity

 

Trade execution regulations are specifically designed to prevent instances of market abuse, such as frontrunning and insider trading. In theory, everyone is trading on a level playing field, which injects a degree of trust, something critical to any investment market. As we have seen in the past, once trust starts to seep away from the market, investors will quickly lose confidence and look elsewhere.

 

Investor protection

 

Whether in trade execution or broader investment regulations, investor protection is at the heart of all of these laws. Investors need to know that when trading through a broker, their transactions will be carried out in an orderly manner and executed at the best possible price at the time. Trade execution regulations put client transactions at the head of the queue to avoid instances where companies may be tempted to put their own interests first.

 

Transparency

 

Can you imagine a situation where trade prices and volumes were not instantly available, and investors effectively traded in the dark? This is another area where trade execution regulations are critical, ensuring complete transparency. There are some situations where sizeable trades may be delayed until market-makers can unwind these, more common where a stock is relatively small and illiquid, but transparency is still the ultimate goal.

 

Systemic risk reduction

 

Systemic risk is best described as the risk of the collapse of an entire financial system. The most recent example is the 2008 financial crisis, which threatened the global financial system. Only the swift response of global regulators managed to nullify, to a certain extent, the financial contagion spreading across the world. While it is tempting to say the 2008 financial crisis was unique, it wasn't, but it certainly isn't as commonplace as it may have been in years gone by.

 

Efficiency and liquidity

 

In recent times, we have seen trade execution regulations tightened in the UK and worldwide to maintain orderly markets. Efficiency and liquidity are at the heart of investment markets, but trends such as high-frequency trading and algorithmic trading need to be controlled. These are some of the elements that have been brought under the regulators' umbrella to support liquidity and efficiency – but not dictate or distort markets.

 

Global standardisation

 

In the modern era, we take for granted the opportunity and ease with which we can trade online in local and international markets. Cross-border trading is only possible because of global standardisation in areas such as trade execution regulations. While not necessarily trading on a like-for-like basis with overseas markets, the general principles are the same. One of the knock-on effects is enhanced trading by international companies, which improves liquidity, market efficiency and overall trust. As a stand-alone investor or an institution, if you know that overseas markets operate similarly to your local market, in relation to protection and marketing pricing, you can focus on investment decisions rather than the mechanics of trading.

 

Technological advancements

 

When it comes to areas such as trade execution regulations, technological advancements have undoubtedly helped to keep markets up to date with the modern world and encouraged the uptake within a controlled environment. If we look at areas such as blockchain, there is the long-term potential to provide an even more secure trading environment and full transparency.

 

Summary

 

When looking at investment markets, trade execution regulations are an integral part of their makeup, creating what are, in theory, level playing fields, efficient markets, and transparent pricing. Global standardisation has played a major role in the development of international trading and the adoption of new technology into the regulatory ecosystem, but within a controlled structure.

So, while many investors may see trade execution regulations as overly complex and cumbersome, they are integral to the efficiency and long-term future of any investment market.

 

 

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