4. How Exchanges Work: Trading Venues, Algorithmic and High-Frequency Transactions

The chapter investigates the functioning of exchanges. First, it discusses the features of different types of trading venues: for instance, the role of newly-introduced OTFs. Then, it debates the role of technology underlying transactions, which is increasingly shifting towards algorithmic (AT) and high-frequency (HFT) solutions, widely regarded by the EU legislator as a potential threat to systemic stability. To provide a deeper understanding of what an automated exchange means, the chapter briefly covers the divide between ‘electronic communication networks’ (ECNs) and ‘market makers’ in the US jurisdiction, which presents a concerning trade-off under multiple aspects (e.g., efficiency vs. transparency). In addition to merely economic aspects, the most salient regulatory tasks are also investigated: inter alia, the platforms being required to ‘self-assess’ themselves—and, specifically, their recourse to AT and HFT techniques—by means of a stress test, aimed at identifying and mitigating systemic threats. Finally, we devote some attention to the so-called ‘SME growth markets’, i.e. a type of MTF specifically designed to trade equities representing small and medium-sized enterprises, for the purpose of sustaining their development.