Einde inhoudsopgave
EU Equity pre- and post-trade transparency regulation (LBF vol. 21) 2021/18.III.2.1.1
18.III.2.1.1 Trading process on RM, MTFs, SIs and other platforms
mr. J.E.C. Gulyás, datum 01-02-2021
- Datum
01-02-2021
- Auteur
mr. J.E.C. Gulyás
- JCDI
JCDI:ADS267188:1
- Vakgebied(en)
Financieel recht / Bank- en effectenrecht
Financieel recht / Europees financieel recht
Financiële dienstverlening / Financieel toezicht
Voetnoten
Voetnoten
See N. Moloney, EU Securities and Financial Markets Regulation, Oxford, 2014.
MiFID I referred to a ‘continuous auction order book trading system’ as a system that by means of an order book and a trading algorithm operated without human intervention that matches sell orders with matching buy orders on the basis of the best available price on a continuous basis (Table 1 MiFID I Implementing Regulation). MiFID II covers a similar definition (Table 1 MiFIR Delegated Regulation 2017/587).
MiFID I referred to a ‘quote-driven trading system’ as a system where transactions are concluded on the basis of firm quotes that are continuously made available to participants, which requires the market makers to maintain quotes in a size that balances the needs of members and participants to deal in a commercial size and the risk to which the market maker exposes itself (Table 1 MiFID I Implementing Regulation). MiFID II covers a similar definition (Table 1 MiFIR Delegated Regulation 2017/587).
MiFID II defines as a ‘market maker’ as a person who holds himself out on the financial markets on a continuous basis as being willing to deal on own account by buying and selling financial instruments against that person’s proprietary capital at prices defined by that person (art. 4(1)(7) MiFID II Directive). A similar definition was in place under MiFID I (art. 4(1)(8) MiFID I).
MiFID II refers to a ‘periodic auction trading system’ as a system that matches orders on the basis of a periodic auction and a trading algorithm operated without human intervention (Table 1 MiFIR Delegated Regulation 2017/587). A similar definition was in place under MiFID I (Table 1 MiFID I Implementing Regulation).
MiFID II refers to a ‘request for quote trading system’ as a trading system where a quote or quotes are provided in response to a request for quote submitted by one or more members or participants. The quote is executable exclusively by the requesting member or participant. The requesting member or participant may conclude a transaction by accepting the quote or quotes provided to it on request (Table 1 MiFIR Delegated Regulation 2017/587). MiFID I did not have a specific definition of request for quote trading systems.
Reference is made to Table 1 MiFID I Implementing Regulation and Table 1 MiFIR Delegated Regulation 2017/587. For the sake of completeness, MiFID II also permits RMs and MTFs to deploy trading systems that are not yet captured under any of the other trading system-definitions (reflecting the aim to capture new trading systems not falling under the explicit MiFID II specifications) (ibid).
In short, broker crossing networks were trading platforms that mainly operated outside RMs and MTFs under MiFID I. Broker crossing networks either (1) internalised client orders or (2) engaged in agency crossing. For an examination of the term broker crossing network, reference is made to chapter 5(section II, paragraph 4.2).
When trading takes place on an RM or MTF, the RM or MTF operator does not face position risks. This is because the operator of an RM and MTF is prohibited from trading on own account.1 Investment firms trading on RMs or MTF, or the clients for whom the investment firm trades, do face position risks.2 The position risks for investment firms trading on an RM or MTF depend on the RM or MTF trading system. Two traditional types of exchanging financial instruments on RMs and MTFs are order-driven and quote-driven systems. An order-driven system is characterised by matching supply and demand without a specific risk-taking intermediary that provides liquidity by trading on its own account.3 The situation is comparable with agency crossing (executing orders on behalf of clients by matching two opposing client orders), albeit that matching of orders on an RM or MTF always occurs on a non-discretionary basis.4 By contrast, quote-driven systems do have a risk-taking intermediary,5 the latter being referred to as a market maker.6
Other equity trading systems of RMs and MTFs are so-called periodic auctions and, since MiFID II, also request-for-quote models. As the name implies, a system that matches orders on the basis of periodic auctions is referred to as a periodic auction.7 Request-for-quote models are trading systems where a risk-taking intermediary provides liquidity through a quote (or quotes) in response to a request from a member or participant of the RM/MTF.8 A final trading system on RMs or MTFs can be hybrid systems, which blends two or more of the other trading processes.9
If one compares the SI equity pre-trade transparency regime with the trading systems available for RMs and MTFs, the SI model is mostly similar to the RM/MTF quote-driven system involving a market maker.10 ‘Mostly similar’, since SIs are (a) only required to publish a firm quote where there is a liquid market and the quote is below or at the standard market size (i.e. the SI regime is more lenient) and (b) SIs always involve a client. The same is not true for market makers.11
The trading process available on or through an RM, MTF, SI or other trading functionality (e.g. broker crossing networks)12 is an important factor for determining the ‘optimal degree’ of equity pre-trade transparency. This is because liquidity is provided in different ways (i.e. different risk positions are apparent) (see paragraphs below).