5.III SIs

The foregoing paragraph examined the MiFID II equity pre-trade transparency rules for RMs and MTFs. Similar to MiFID I, instead of transmitting a client order to an RM or MTF, investment firms can under MiFID II also internalise orders. Internalisation of client orders takes place where an investment firm acts on one side of the transaction for the account of the client and on the other side on its own account.1MiFID II, similar to MiFID I, makes a distinction between internalisation and systematic internalisation. Where internalisation qualifies as being ‘systematic’, this means that the investment firm needs to comply with a specific pre-trade transparency regime (the MiFID II definition of a SI is examined below).2

The rationale behind the distinct pre-trade transparency regime is to balance between the merits of pre-trade data publication and the position risks of SIs. Pre-trade data publication supports price formation, investor protection, and the level playing field between SIs and RMs/MTFs. However, pre-trade data publication could lead to strategic behaviour by other investors and expose the SI.3MiFID II aims to balance these positions. Although not always entirely clear due to political compromise, MiFID II intends to find a middleground between pre-trade data publication and the position risks of SIs.

MiFID II changes the SI equity regime in four key ways. First, MiFID II expands the scope of the SI regime from (a) shares admitted to trading on an RM to (b) shares, depositary receipts, ETFs, certificates and other similar financial instruments admitted to trading on an RM or traded on a trading venue. Second, MiFID II adds quantitative elements to the SI definition. Third, MiFID II tightens the equity pre-trade transparency requirements. Under MiFID II SIs are required to publish more equity pre-trade data and less exceptions to the rules are available. Fourth and finally, the SI-definition has become more rule-based. The SI regime is part of the MiFID II Review (see section VII below).