5.VII.1.3.1.1 Initial position: ESMA opinion of 2019

ESMA already issued an opinion on frequent batch auctions at an earlier stage. A main element of the ESMA opinion is that frequent batch auctions need to notify the market that the frequent batch auction in question started (which MiFID II does not prescribe). The aim of the ESMA opinion is to make market participants aware that there might be a trading opportunity and enable them to participate in the frequent batch auction.1 Frequent batch auctions currently fall under the more general MiFID II classification of ‘periodic auctions’, thereby making no distinction between conventional auction systems (i.e. opening and closing auctions) and the new frequent batch auctions.2 The ESMA opinion identified differences between conventional auction systems and frequent batch auctions, in particular (a) the short durations of frequent batch auctions, as well as (b) frequent batch auctions being triggered by market participants, rather than pre-determined times for closing and opening auctions.3 The ESMA opinion ESMA observed that frequent batch auctions are characterised by (i) the use of so-called pegged auctions (referenced prices), (ii) the use price band limitations to ensure the the uncross price is always within the EBBO/PBBO (referenced prices) and (iii) the practice of locking in prices at the beginning of the auctions (a static price in case the locked price does not follow the submission of unadjusted limit orders). The ESMA opinion considers these functionalities to be non-price forming. ESMA expressed the view that these practices may undermine the price formation process and stated that non-price forming frequent batch auctions ‘should, in principle, operate under a waiver from pre-trade transparency’.4