4.VI Conclusion about MiFID I

MiFID I introduced several top-down elements with respect to equity pre-trade transparency compared to the ISD. The top-down elements were in place to ensure that investors were adequately informed as to the true level of potential transactions in shares admitted to trading on an RM, whether those potential transactions took place on RMs, MTFs, SIs, or outside those trading venues.1

The pre-trade transparency rules were part of the broader MiFID I framework designed to promote competition between trading platforms for execution services. A high degree of pre-trade trade transparency was considered to be an essential part of this framework, so as to ensure a level playing field between trading venues, the price discovery mechanism in particular shares was not impaired by fragmented liquidity, and investors thereby not penalised.2 On the other hand, MiFID I recognised that there could be circumstances where exemptions from pre-trade transparency obligations, whether through waivers or other exceptions, could be necessary. MiFID I therefore set out a pre-trade transparency regime 155intending both to ensure a high level of pre-trade transparency, and to ensure that liquidity was not impaired as an unintended consequence of the pre-trade transparency obligations.3

As will be examined below, MiFID I was partially successful in achieving its aims. MiFID I was considered as a main enhancement on the ISD.4 MiFID I was successful in terms of increased competition, lower transaction costs, and enhanced investor choice.5 That being said, several problems were identified with MiFID I. First, the competitive approach resulted in market fragmentation, which made the equity trading environment more complex, including for an overview of the potential transactions in the market.6 Second, technological developments outdated several MiFID I provisions. For instance, investment firms operating internal electronic matching systems, so-called broker crossing networks, emerged. Despite sometimes being functionally similar to RMs/MTFs or SIs, such investment firms were not subject to the same regulatory framework. Regulatory risks arose in terms of a lack of a level playing field, potential harm to the price formation process and the disability to observe current trading opportunities across the EEA.7 Third, and finally, the amount of dark trading grew under MiFID I, among other things, due to regulatory arbitrage and legal unclarity. As the following paragraph will clarify, MiFID II is a reaction to the situation under MiFID I. One of the main MiFID II objectives is to enhance the amount of pre-trade transparency compared to MiFID I, whilst preserving a competitive market place.