EU Equity pre- and post-trade transparency regulation (LBF vol. 21) 2021/5.II.1.3.1:5.II.1.3.1 Calibration to the trading system

EU Equity pre- and post-trade transparency regulation (LBF vol. 21) 2021/5.II.1.3.1

5.II.1.3.1 Calibration to the trading system

Documentgegevens:

mr. J.E.C. Gulyás, datum 01-02-2021

Datum: 01-02-2021
Auteur: mr. J.E.C. Gulyás
JCDI: JCDI:ADS267121:1
Vakgebied(en): Financieel recht / Bank- en effectenrecht
Financieel recht / Europees financieel recht
Financiële dienstverlening / Financieel toezicht

MiFID II specifies the range of bids and offers or designated market maker quotes and the depth of trading interest at the prices. Similar to the previous regime, MiFID II calibrates the equity pre-trade data to publish to the underlying trading system used by the RM or MTF. MiFID II distinguishes between five trading systems, that is – (1) continuous auction order-driven; (2) quote-driven; (3) periodic auction; (4) request for quote; and (5) trading systems not covered by points (1-4).1MiFID II therewith covers two order-driven systems (also ‘auctions’), namely a continuous matching system (also a ‘central order book’) (system 1) and a periodic matching system (a so-called call market) (system 3). MiFID II covers two quote-driven systems, that is – system 2 and 4. Trading systems not qualifying as an order-driven or quote-driven system or combining features of different trading systems (so-called hybrid systems) fall in the residual category (system 5). New under MiFID II is the reference to the ‘request for quote’ trading system (point 4). MiFID I did not distinguish ‘request for quote’ as a separate trading system. MiFID II specifies the equity pre-trade data to publish for each given trading system through a MiFID II Implementing Regulation (see below).

MiFID II requires the following equity pre-trade data to be made public:

1.: Continuous auction order book trading systems (system 1)2 need to make public: (a) the aggregate number of orders; and (b) the equity instruments that they represent at each price level (depth). The publication needs to be for at least (c) the five best bid and offer price levels.3 A similar requirement was in place under MiFID I.4
2.: Quote driven trading systems (system 2)5 represent the availability of one or more market makers.6MiFID II requires a quote-driven system to make public: (i) the best bid and offer of each market maker in the equity instrument traded on the trading system; (ii) together with the volumes attaching to those prices (depth). The quotes made public need to be those that (a) represent binding commitments (firm) to (b) buy and sell (two-way quote) the financial instruments; and which (c) indicate the price and volume of financial instruments in which the market makers are prepared to buy or sell. MiFID II also covers two provisions to protect the position risks of market markets. First, MiFID II allows in ‘exceptional market conditions’ indicative or one-way prices for a limited time.7 A provision was in place under MiFID I.8 Second, and new under MiFID II, is that market makers need 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.9MiFID II does not (1) specify the ‘balance’ between the needs of members and participants versus the position risks of market makers. MiFID II also does not (2) consitute what ‘exceptional market conditions’ are.
3.: Periodic auction systems (system 3)10 have the distinct feature that only the price that would best satisfy the trading algorithm of the system needs to be made public.11MiFID II requires periodic auction to publish: (1) the price at which the auction would best satisfy its trading algorithm in respect of the equity instrument and (2) the volume that would potentially be executable at that price by participants in that system.12 Similar provisions were in place under MiFID I.
4.: Request for quote trading systems (system 4)13 are characterised by one or more members or participants that, as the name implies, request a quote from the trading system.14 The request for quote trading system differs from the quote driven-trading system (system 2), as the latter involves no requests from members or participants. MiFID II obliges request for quote trading systems to publish the quotes and attached volumes from any member or participant, which if accepted, would lead to a transaction to be published. All submitted quotes in response to a request for quote may be published at the same time, but not later than when they become executable.15 Request for quote trading systems were not distinguished as a separate trading system under MiFID I. ESMA has published specific guidance in relation to request for quote trading systems and ‘actionable indications of interest’ (see also paragraph 1.2.2 above).16
5.: MiFID II specifies what equity pre-trade data needs to be made public by trading systems not covered by systems (1-4).17 Under MiFID II these trading systems need to publish (a) adequate information as to the level of orders or quotes and (b) of trading interest in respect of equity instruments trading on the system. MiFID II in particular requires the publication of the five best bid and offer price levels and/or two-way quotes of each market maker in that instrument, if the characteristics of the price discovery mechanism so permit.18 Similar provisions were in place under MiFID I.

The category of ‘any other trading system’ indicates that the MiFID II list of trading systems is not exhaustive. With the aim of supporting hybrid systems (combinations of the other trading systems) and future evolutions in trading methods, MiFID II permits ‘any other trading system’. The other trading system is required to provide an appropriate degree of pre-trade transparency comparable to that required under the trading systems mentioned under points (1-4).19

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Art. 2 and Annex I MiFIR Delegated Regulation 2017/583.

MiFID II describes 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 matches sell orders with buy orders on the basis of the best available price on a continuous basis (Table 1 of Annex I MiFIR Delegated Regulation 2017/583).

Art. 2 and Annex I MiFIR Delegated Regulation 2017/583.

Art. 17(2) MiFID I Implementing Regulation.

MiFID II describes 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 (Table 1 of Annex I MiFIR Delegated Regulation 2017/583). See in this context also Kumpan and Muller-Lankow who note that a single-dealer (single market maker) system can be multilateral if the market operator (of the RM or MTF) and the single-dealer (single market maker) are not the same person (C. Kumpan and H. Muller-Lankow, ‘The multilateral single-dealer system – an oxymoron under MiFID II?’, 13 September 2017, p. 21).

A ‘market maker’ means 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 the person (art. 4(1)(7) MiFID II).

Art. 3(1) and Table 1 of Annex I MiFIR Delegated Regulation 2017/583.

Art. 17(3) MiFID I Implementing Regulation.

Art. 3(1) and Table 1 of Annex I MiFIR Delegated Regulation 2017/583.

10.

MiFID II describes 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 of Annex I MiFIR Delegated Regulation 2017/583).

11.

In addition, no human intervention is permitted on a periodic auction (Table 1 of Annex I MiFIR Delegated Regulation 2017/587).

12.

Table 1 of Annex I MiFIR Delegated Regulation 2017/587.

13.

MiFID II describes a ‘request-for-quote trading system’ as a trading system where a quote or quotes are provided in response to a request for a quote submitted by one or more other 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 of Annex I MiFIR Delegated Regulation 2017/587).

14.

The requested quote is executable exclusively by the requesting member or participant. The requesting member of participant may conclude a transaction by accepting the quote or quotes provided to it on request (Table 1 of Annex I MiFIR Delegated Regulation 2017/587).

15.

Table 1 of Annex I MiFIR Delegated Regulation 2017/587.

16.

ESMA clarifies, among other things, that the definition of an actionable indication of interest encompassess ‘any quote which is provided in response to an RFQ from one member or participant to another and that contains all the necessary information to agree on a trade.’ ‘All the necessary information to trade’, according to ESMA, ‘should be intended as side, size and price of the proposed transaction (…)’ (ESMA, Opinion on the assessment of pre-trade transparency waivers for equity and non-equity instruments, 16 December 2020(ESMA70-155-6641), p. 16-17). The clarification of ESMA is relevant, as it clarifies how the MiFID II request-for-quote pre-trade transparency obligations apply to actionable indications of interest.

17.

MiFID II describes ‘any other trading system’ as any other type of trading system, including a hybrid system falling into two or more of the types of trading systems referred to under points (1-4) (Table 1 of Annex I MiFIR Delegated Regulation 2017/587).

18.

Table 1 of Annex I MiFIR Delegated Regulation 2017/587

19.

Table 1 of Annex I MiFIR Delegated Regulation 2017/587