5.II.1.6.4 Exclusion of OTFs from the equity pre-trade transparency regime

MiFID II has introduced a new trading venue, that is – the OTF (Organised Trading Facility). A main difference between OTFs and RMs/MTFs is that OTFs are discretionary venues. While RMs and MTFs have non-discretionary rules for the execution of transactions, OTFs should carry out order execution on a discretionary basis. The OTF has been introduced to complement the existing types of trading venues, that is – RMs and MTFs.1 The MiFID II equity pre-trade transparency regime does not apply to OTFs.

The exclusion of OTFs from the equity markets, including the applicability of equity pre-trade transparency rules, proved to be controversial in drafting MiFID II. Sharp points of difference arose as to the balance between organised and non-organised trading, as well as on the treatment of equity versus non-equity markets. The Commission’s MiFIR Proposal wanted to introduce the OTF. In view of the Commission, the OTF would make the European markets more transparent and level the playing field between various venues offering trading services.2 The Commission proposed the OTF to apply to both equity and non-equity instruments. The Commission suggested identical equity pre-trade transparency obligations for RMs, MTFs, and OTFs.3

The position of the Commission changed during the subsequent negotiations in the European Parliament and the Council. The European Parliament confined the scope of the OTF to non-equity only.4 The Council was strongly divided when it came to the OTF classification. Some Member States favoured the OTF, but called for less stringent requirements. Others were in favour of a strict OTF regime (including equity), and others calling for the removal of the OTF and for all trading to take place on RMs, MTFs, and SIs.5

Different arguments were put forward to confine the OTF to non-equity only. Some Member States argued that a disadvantage of OTFs available for equity instruments would be that by adding an additional regulated venue fragmentation in equity trading could increase. Increased fragmentation would make it harder to determine what ‘the’ price for an equity instrument would be (price formation could be harmed).6 Second, some Member States saw the additional competition presented by OTFs as a disadvantage. These Member States feared that the trading that took place on a national RM or MTF would move towards an OTF not necessarily available in the Member State.7 Third and finally, it was believed (although not universally) that the discretionary nature of the OTF could harm the quality of price formation in the equity markets, especially for pre-trade information. The argument was that the discretion of the OTF operator would enable intervention with equity trading. The equity pre-trade information disclosed to the market would accordingly not exactly be the market view. Instead, the market view would be mixed with the OTF operator taking a view on whether or not to trade.8

After complex negotiations, political compromise was finally reached. MiFID II would confine the OTF to non-equity only.9 To complement this situation a MiFID II obligation would require multilateral internal matching systems in equity instrument to become an MTF. The implication for the MiFID II equity pre-trade transparency regime was that the OTF would fall outside the scope. The only trading venues subject to the MiFID II equity post-trade transparency would be RMs and MTFs. This position is also apparent in the final MiFID II-regime. MiFID II applies equity post-trade transparency obligations to RMs and MTFs, but not to OTFs.10 A MiFID II requirement is in place that in short obliges multilateral internal matching systems executing client orders in equity instruments to become authorised as an MTF (see paragraph 2.4 below).11