3.IV Conclusion about the ISD

The ISD was the first framework to introduce harmonised rules for trading financial instruments in the EEA. The ISD was fairly top-down when it came to the concentration of trading. Member States had the choice (not: the obligation) to require investment firms to undertake trades on RMs (save for exceptions). By contrast, the ISD was bottom-up when it came to pre-trade transparency provisions. The ISD pre-trade transparency provisions only applied to RMs (not: investment firms). The ISD pre-trade transparency provisions were minimum harmonised and the pre-trade transparency obligation was limited. The ISD pre-trade transparency obligation and its exceptions were broadly phrased. In effect, Member States and, where permitted by national regulation, the market (i.e. RMs/investment firms) had flexibility with respect to equity pre-trade transparency. Despite the ISD’s bottom-up framework for pre-trade transparency, RMs often published a high degree of pre-trade transparency available on the market, whether imposed through national law or set by the RM itself (subject to Member State approval). The same was true for some (not: all) ATSs.1 Exceptions to the equity pre-trade transparency obligations were in place to avoid unintended consequences following pre-trade data publication (i.e. to preserve liquidity).2

Despite the high degree of pre-trade transparency, there were also concerns about the ISD regime. Under the ISD there was only limited competition in terms of trading. Equity trading was largely concentrated on national RMs, in particular due to the optional ISD concentration rule.3 Second, the level of pre-trade transparency varied substantially across the Member States. The details of the equity pre-trade transparency obligations and exceptions differed across Member States. The Commission noted that there were ‘enormous discrepancies’ in the level of transparency across RMs.4 This could, among other things, harm the level playing field across RMs in the EU. Third, technological developments resulted in new types of trading platforms, that is – alternative trading systems and order internalising systems. These new trading platforms often fell outside the regulatory framework for RMs and instead classified as the less regulated ‘investment firms’. For this reason, level playing field and related regulatory arbitrage risks arose, as well as the potential of a harmed price discovery process.5

MiFID I, the successor of the ISD, intended to change this situation. The aim of MiFID I was to establish a competitive market. Equity pre-trade transparency rules were an important part of the MiFID I regime. The equity pre-trade transparency regime of MiFID I is examined in the following chapter.