5.IX Conclusion about the development from ISD to MiFID II

On the whole, part I of the research (chapters 2-5) illustrates the increase in EU equity pre-trade transparency regulation from the ISD to MiFID II. Whereas the ISD equity pre-trade transparency framework was rather bottom-up, the succeeding regimes have resulted in a flood of EU equity pre-trade transparency rules, in particular MiFID II. The increase is best understood against the background of establishing an integrated European capital market. A main question for the EU is whether the integration is better achieved through (a) concentrated trading on highly transparant trading platforms or (b) a trading landscape in which order execution platforms can compete and innovate, including in terms of (limited) transparency. The market setting is an important factor in explaining the amount of EU equity pre-trade transparency rules. This is evident in the development from ISD to MiFID II:

The ISD restricted competition (optional concentration-rule) and accordingly needed less harmonised equity pre-trade transparency rules (trading would already be largely concentrated on RMs). Where trades are concentrated on RMs, harmonised equity pre-trade transparency rules are not deemed acute. RMs have strong incentives to display equity pre-trade transparency in order to attract order flow, as well as to make profits from selling the data. Although difficult to assess due to political controversy and compromise, a similar perspective was reflected in the ISD regime.

The situation changed where the EU regime intended to support competition across different types of trading platforms. This was evident under MiFID I, where orders could be executed on RMs and MTFs, but also outside these venues, such as through execution in-house, whether though (systematic) internalisation or agency crossing. To ensure a sufficient overview of the market, as well as a level playing field, the EU decided to introduce top-down equity pre-trade transparency rules under MiFID I. Distinct equity pre-trade transparency rules applied to RMs, MTFs, SIs, and investment firms executing client limit orders (including, but not only, SI). In applying the rules, the EU aimed to find a balance between a high degree of equity pre-trade transparency and a level playing field versus exceptions in order to prevent unintended consequences following pre-trade publication (i.e. harmed liquidity).

MiFID II changes several aspects of the MiFID I regime. While MiFID II plans to retain a competitive trading landscape (similar to MiFID I), MiFID II has the ambition to shift trading towards regulated venues that, among other things, are characterised by a high degree of equity pre-trade transparency. Although MiFID I was generally considered a success in terms of competition, perceived shortcomings of MiFID I included the lack of equity pre-trade transparency. Under MiFID I the amount of dark trading (trading without pre-trade transparency) grew. MiFID II intends to remedy the MiFID I-situation by providing an even more top-down equity pre-trade transparency regime. The result is an increase in EU equity pre-trade transparency regulation under MiFID II. The intention here is to support the level playing field, price formation, and reduced search costs for investors. In order to so, MiFID II expands the scope of the equity pre-trade transparency regime, clarifies definitions, provides rule-based and operational provisions, and a share trading obligation has been introduced. MiFID II tightens several of the MiFID I equity pre-trade transparency rules. Similar to the MiFID I, MiFID II intends to find a balance between the merits of equity pre-trade transparency versus benefits of dark trading (i.e. preserve liquidity). However, MiFID II does so in a more top-down and equity pre-trade transparent way.

The current MiFID II Review, in particular of ESMA, shows that MiFID II has only been partially successful. ESMA seems willing to tighten the MiFID II equity pre-trade transparency regime even further. ESMA proposes more share trading to be concentrated on RMs, MTFs, and SIs, all being subject to MiFID II equity pre-trade transparency rules. Stricter equity pre-trade transparency rules are proposed for SIs in order to enhance transparency and improve the level playing field with RMs and MTFs. While ESMA proposes to clarify the MiFID II share trading-obligation even further, in particular in relation to third-country shares and exemptions, (i.e. increase in EU regulation), ESMA also supports a simpler operational framework for the double volume cap (including in terms of data collection, calculations, and publication), if the volume cap is maintained (i.e. less EU regulation). In sum, the consequence of the increase in EU equity pre-trade transparency regulation under MiFID II is improved equity pre-trade transparency, but in view of ESMA not enough. The ESMA MiFID II Review reveals market-shaping elements, as reflected in ESMA proposals to ensure more trading takes place on equity pre-trade transparent venues.