EU Equity pre- and post-trade transparency regulation (LBF vol. 21) 2021/18.III.1.1:18.III.1.1 Market-led philosophy

EU Equity pre- and post-trade transparency regulation (LBF vol. 21) 2021/18.III.1.1

18.III.1.1 Market-led philosophy

Documentgegevens:

mr. J.E.C. Gulyás, datum 01-02-2021

Datum: 01-02-2021
Auteur: mr. J.E.C. Gulyás
JCDI: JCDI:ADS267053:1
Vakgebied(en): Financieel recht / Bank- en effectenrecht
Financieel recht / Europees financieel recht
Financiële dienstverlening / Financieel toezicht

The main purpose of the market-led philosophy is to ensure competition, innovation, and investor choice. The market-led philosophy intends to achieve these goals through enabling investment firms to choose themselves where to execute orders, as long as best execution-obligations are met (i.e. freedom is important). Transparency-rules (and best execution-rules) are seen as an effective tool to mitigate potential fragmentation risks (e.g. dispersed liquidity) and to ensure best execution in the competitive setting.1 While benefits of transparency are highly appreciated for purposes such as price formation, a central theme of the market-led philosophy are transparency risks.2 Not only does the market-led philosophy highlight the protection of investment firms who provide liquidity by trading on own account (e.g. reduce market impact from data disclosure),3 it also stresses the improvement of investor positions (e.g. the ability to execute at the midpoint or to negotiate a better deal through opacity).4 In effect, the market-led philosophy emphasizes the merits of dark liquidity (i.e. trading without pre-trade transparency) and deferral of post-trade data publication.

Another central feature of the market-led philosophy is reluctance of EU intervention. A main belief of the market-led philosophy is that the market is best equipped to decide on: (a) what equity pre- and post-trade data should be published and at what speed,5 (b) whom can publish and consolidate equity pre- and post-trade data,6 and (c) how equity pre- and post-trade data can be accessed in terms of data prices and terms and conditions for using the data.7 EU intervention (i.e. top-down) is possible, but only in cases of clear market failure and where EU intervention results in a better result compared to non-intervention.8

Toon alle voetnoten

Voetnoten

Voetnoten

See, for example, recital 5 MiFID I Implementing Regulation and CESR, MiFID I Review, July 2010(CESR/10-802), p. 6-7.

See, for example, B Steil, The European Equity Markets, ECMI, 1996, p. 32-33; and G. Ferrarini and F. Recine, The MiFID I and Internalisation, in G. Ferrarini and E. Wymeersch (Eds.), Investor Protection in Europe: Corporate Law Making, The MiFID and Beyond, Oxford University Press, 2006.

See, for example, the position of the UK in drafting the ISD. The UK opposed harmonized post-trade transparency obligations in light of position risks for internalising investment firms. The drafting history of MiFID I and MiFID II shows similar considerations of the market-led philosophy. For an examination, reference is made to chapters 7-9.

Controversial in drafting both MiFID I and MiFID II, as well as under the current MiFID II Review, is the status of the reference price and negotiated trade waiver for liquid equity instruments. The market-led philosophy has traditionally argued in favour of these waivers in light of their ability to improve investor positions. For an examination, reference is made to chapters 3-5.

For example, under MiFID I the market-led philosophy disagreed with introducing an SI regime and the client limit order display-rule (chapter 4). Likewise, the market-led philosophy opposed the intervention under MiFID II in the form of the double volume cap (chapter 5). Another debate is the speed of publication. The market-led philosophy generally opposes faster post-trade data publication based on the grounds that specific trades, such as negotiated trades take more time to report compared to electronic trades through order-books (chapters 8-9).

This is in particular visible in the consolidation of equity pre- and post-trade data. The market-led philosophy has traditionally opposed means of EU intervention in the form of ‘consolidated quotes’ and ‘consolidated tapes’. For an examination, reference is made to chapters 10-13.

The discussion about market data prices and terms and conditions is relatively new in EU equity pre- and post-trade transparency regulation. The debate started to gain serious momentum in drafting MiFID II. Based on the complexity involved with drafting pricing rules and the possibility of market-driven corrections, the market-led philosophy generally opposes EU intervention in terms of data pricing rules. For an examination, reference is made to chapters 10-13.

For the sake of clarity, a market failure should always be the starting point for EU intervention, including in relation to proportionality and subsidiarity of EU intervention. The point here is that the market-led philosophy is relatively hesitant when it comes accepting that there is a market failure and accordingly whether EU equity pre- and post-trade transparency regulation is proportional and subsidiary. An example includes the introduction of the double volume cap, which the market-led philosophy opposes. Main arguments of the market-led philosophy are the unnecessity and complexity of the double volume cap. For an examination, reference is made to chapter 5(section VII).