What it means
For a market to be trusted, participants need to know that the rules are clear and applied fairly. A regulated market is one that has been authorised by a competent authority and must keep to detailed requirements.
These cover which securities may be admitted, how trades are matched, how prices are reported and how the market guards against manipulation. In European Union law, a regulated market is defined as a multilateral system run by a market operator that brings together many buyers and sellers in financial instruments under non-discretionary rules.
It must be authorised and must operate regularly, with rules that are published and applied equally to all participants. The definition appears in the Markets in Financial Instruments Directive, usually shortened to MiFID, and it separates regulated markets from other venues that have lighter rules.
The distinction matters for companies and investors. Companies listed on a regulated market normally face stricter disclosure duties, such as publishing audited accounts and reporting price-sensitive news promptly, and they must follow rules on corporate governance.
In return, their shares can usually be held by a wider group of investors, including funds that are only allowed to invest in regulated venues. Not every trading venue is a regulated market.
Some are multilateral trading facilities or similar platforms with lighter rules and lower listing costs, which suit smaller or younger companies. They are still supervised, but the level of obligation is different, and investors should understand what protections apply.
Regulation also helps with market integrity. Rules against insider dealing and market manipulation apply, trade data are reported, and operators must have systems to detect abuse.
This improves confidence, and confidence is what attracts investors and keeps the cost of raising capital down for the companies that list there. For a finance reader, the useful habit is to ask where a security trades and under what regime.
Accounting standards, tax treatment and investment mandates sometimes depend on whether a security is traded on a regulated market. A short check at the start of a transaction can avoid awkward surprises.
In practice
Real-world examples.
Example
A mid-sized manufacturer chooses to list on its country's main stock exchange, a regulated market. It accepts the duty to publish audited accounts twice a year, and in return it gains access to institutional investors who can only buy listed shares.
Example
A pension fund's investment policy allows it to hold only securities that trade on regulated markets. When a manager proposes a company that trades on a smaller platform, the compliance officer rejects it until the policy is changed. The manager has to look for a comparable company on a regulated venue instead.
Example
An analyst compares two small companies, one listed on a regulated market and one on a lighter-rules platform. She finds that the first publishes detailed periodic information, while the second discloses less, and she adjusts her risk assessment. The lighter-rules company needs a higher expected return to justify the same investment.
Case study
Seen in the real world.
Marlborough Biotech is an illustrative, fictional company that needed to raise $20,000,000 for clinical trials. Its board debated whether to list on a regulated market or on a smaller, lighter-rules platform.
The smaller platform would have cost about $300,000 to join, compared with about $900,000 for the main market, and the board spent several meetings weighing the difference. However, several large investment funds told the finance director that they could not invest in companies outside regulated markets.
The board chose the regulated market, accepted the higher cost and raised the full amount from a broader group of investors. The extra $600,000 of listing cost was less than 3% of the money raised, and the finance director told the board it was worth paying. The illustrative lesson is that the extra cost of a regulated listing can be repaid by access to a larger pool of capital.
Watch out
Common mistakes.
- Assuming that every trading venue is a regulated market, when many platforms operate under lighter rules.
- Treating regulation as a guarantee of a good investment, when it only sets standards for fairness and disclosure and says nothing about the price paid.
- Ignoring investment mandates, which may restrict a fund to securities traded on regulated markets.
Questions
People also ask.
What makes a market regulated?
It is authorised by a competent authority and must follow rules on admission, trading, transparency and the prevention of abuse.
Does regulation protect me from losses?
No, it aims to make the market fair and transparent, but prices can still fall and investments can still fail. Investors still need to judge the business itself.
Why do some companies avoid regulated markets?
The costs and disclosure duties are higher, so smaller or younger companies sometimes prefer a lighter platform.
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