Last year the European Commission outlined plans to address the huge number of private, exchange-like platforms that are not covered by MiFID rules by creating a new category of "organised trading facility".

Under the proposals, banks will have to change their private trading systems to formal venues, publicly posting prices at the end of each day.

However, in a letter to commissioner for internal market and service Michel Barnier, the Federation of European Securities Exchanges says the move does not go far enough and all platforms should come under the same MiFID framework.

"In our view, these broker platforms are exactly what MiFID was designed to regulate, and so they should be considered as a trading venue according to MiFID," says the federation, which represents 46 exchanges.

A new category will make matter worse by increasing the scope for regulatory arbitrage as new MTFs abandon their licenses and rush to become more lightly regulated OTFs.

The letter also warns about the lack of transparency requirements in the OTF proposals, arguing that "at best, it would provide regulators with some basic figures about brokers' private exchanges. But it would never serve the purpose of imposing the necessary public safeguards on their trading."

The real issue, say exchanges, is regulating appropriately dark trading and OTC markets so that OTC is no longer a "default category into which it is easy to opt".

Ultimately, says the letter: "Instead of closing the loophole that has allowed large parts of equity trading to go unregulated, the current plans would create incentives for all to pursue lighter treatment, starting an irreversible race to the bottom."