19.III.1 Market philosophies

A main conclusion of the research is that there are three factors that explain why EU equity pre- and post-trade transparency regulation increased from the ISD to MiFID II. The first factor is the market philosophy. Two market philosophies have been dominant from the ISD to MiFID II. On the one hand, there is the so-called market-led model, which is inspired by the principle of freedom. The market-led model favours investment firms to decide where orders are executed, as long as best execution-obligations are met. Emphasis is on market forces and/or national law (not: EU regulation) to achieve the equity pre- and post-trade transparency objectives. On the other hand, there is the market-shaping philosophy. The market-shaping philosophy is inspired by the principle of equality. Emphasis is on equal treatment of investors (in particular retail versus institutional), including in terms of equal access to trading information (equity pre- and post-trade data). The market-shaping philosophy has traditionally focused on a concentrated market of regulated venues, including RMs. An underlying assumption of the market-shaping philosophy is that best execution is most adequately achieved on a concentrated market where liquidity is pooled and potential (pre-trade) and actual (post-trade) transactions are transparent.1 Regulatory intervention at the EU level is seen as an important instrument to achieve equity pre- and post-trade transparency objectives. Both market philosophies prefer a high level of transparency, but differ on what the high degree of transparency constitutes and by whom it needs to be published. Brexit will result in a void in the market-led camp. It is difficult to predict how political dynamics will evolve, but unless the supporters of the market-led philosophy are able to fill the void of the UK, it could very well be that future EU equity pre- and post-trade transparency regulation will have more market-shaping elements.