EU Equity pre- and post-trade transparency regulation (LBF vol. 21) 2021/11.IV:11.IV Background

EU Equity pre- and post-trade transparency regulation (LBF vol. 21) 2021/11.IV

11.IV Background

Documentgegevens:

mr. J.E.C. Gulyás, datum 01-02-2021

Datum: 01-02-2021
Auteur: mr. J.E.C. Gulyás
JCDI: JCDI:ADS267182:1
Vakgebied(en): Financieel recht / Bank- en effectenrecht
Financieel recht / Europees financieel recht
Financiële dienstverlening / Financieel toezicht

During the ISD negotiations, several Southern Member States (in particular France), wanted to introduce a consolidated tape and consolidated quote modelled to the US-experience.1 The Southern Member States preferred a single entity to collect and publish pre- and post-trade data across the EU. In the view of the Southern Member States regulatory intervention was necessary to ensure a reliable overview of trading activity in the EEA.2 The Northern Member States disagreed, reflecting the view that market-forces alone would be able to provide a consolidated view of pre- and post-trade activity.3

In the end, the ISD only provided very high-level rules on the publication of data, and no provisions with respect to a consolidated tape/consolidated quote were in place. What did happen was that, after extensive negotiations, Member States adopted a compromise position on the concentration of trading, that is – the optional ISD concentration-rule. The ISD concentration-rule, combined with national rules obliging trades to be reported to an RM, mitigated the risks of fragmentation. Accordingly, the need for a mandatory consolidated tape or quote under the ISD became less pressing.4

The result of the ISD concentration-rules and national rules was that RMs primarily controlled equity pre- and post-trade data publication.5 As noted, the timing and accuracy of published data was not an issue. This is perhaps not surprising, given the commercial interest of RMs in selling or licensing the data. That being said, there was a slow adoption of common data standards and protocols. The lack of common data standards and protocols posed barriers to consolidation, at least for smaller companies (i.e. too costly to ‘map’ into one standard). There was a big push from investment firms towards common standards and protocols, but CESR described the process as too slow.6

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See B. Steil, European Equity Markets, ECMI, 1996, p. 118. The meaning of a consolidated tape and consolidated quote have been examined in chapter 10. The US mandated the creation of a ‘National Market System’ (NMS) in the mid-1970s. The NMS consisted out of (1) the Consolidated Tape Association (CTA), (2) the Consolidated Quotation System (CQS), and (3) the Intermarket Trading System (ITS). The CTA, CQA, and ITS are electronic price displaying (pre- and post-trade) and order-routing systems linking trading activity across the U.S. (See B. Steil, European Equity Markets, ECMI, 1996, p. 118). For a recent analysis of the US experience with a consolidated tape and consolidated quote, reference is made to chapter 13.

See B. Steil, European Equity Markets, ECMI, 1996, p. 118.

Illustrative here is the 1990 Euroquote project. Euroquote was supposed to create a technological infrastructure for, among other things, ‘the collection and redistribution of market data and company information’. Germany believed that there was no need for Euroquote as an information-only system, since such services were already provided by several market participants (data vendors). In addition, the UK wanted to extent the UK system (SEAQ International) to all Member States, with the UK system ‘already functioning as a de facto pan-European quotation system’ (A.N. Licht, ‘Stock Market Integration in Europe’, Harvard Law School: Program on International Financial Systems, March 1997, p. 42). The Euroquote project was later abandoned, including due to concerns about competition from data vendors, such as Reuters (N. Moloney, EC Securities Regulation, Oxford EC Law Library, 2002, p. 686). In other words, concerns about the Euroquote project show that market forces (data vendors) were already believed to provide sufficient consolidation services.

This argument is based on B. Steil, European Equity Markets, ECMI, 1996, p. 59-64. Reference is also made to the MiFID II Review in which the degree of fragmentation is considered to be a main factor to ensure data is consolidated. The MiFID II Review is examined in chapter 13.

Similar K. Lannoo, Financial Market Data and MiFID, ECMI Policy Brief, March 2007, p. 1.

CESR, Public Consultation: Publication and Consolidation of Market Transparency, October 2006 (CESR/06-551), p. 6-7.