Einde inhoudsopgave
EU Equity pre- and post-trade transparency regulation (LBF vol. 21) 2021/18.III.3.2
18.III.3.2 New types of venues
mr. J.E.C. Gulyás, datum 01-02-2021
- Datum
01-02-2021
- Auteur
mr. J.E.C. Gulyás
- JCDI
JCDI:ADS267140:1
- Vakgebied(en)
Financieel recht / Bank- en effectenrecht
Financieel recht / Europees financieel recht
Financiële dienstverlening / Financieel toezicht
Voetnoten
Voetnoten
For an examination of the rise of ATSs and order internalising systems, reference is made to chapter 3 and chapter 6.
FESCO, The Regulation of Alternative Trading Systems in Europe: A Paper for the EU Commission, September 2000(FESCO/00-064c), p. 13-16.
The only applicable MiFID I pre-trade transparency rule for broker crossing networks was the client limit order display rule (art. 22(2) MiFID I). Broker crossing networks were similar to almost similar post-trade transparency rules as RMs and MTFs. For an examination of the equity pre- and post-trade transparency rules that applied to broker crossing networks under MiFID I, reference is made to chapter 4 (pre-trade) and chapter 8 (post-trade).
CESR, MiFID I Review, July 2010(CESR/10-802), p. 35.
Recital 6 MiFIR. ‘In a nutshell’, because it is theoretically possible that an internalising investment firm does not meet the MiFID II SI-thresholds. In this situation, the internalising investment firm could still be regarded as a ‘broker crossing network’ under MiFID II. This possibility is, however, quite theoretical given the strict MiFID II SI-thresholds. See in this context D. Mensah, ‘Dark execution strategies under MiFID II: A few shades lighter?’, Journal of Securities Operations & Custody, 2017, p. 329-333. Another complexity is the unclear definition of an ‘internal matching system’. For an examination, reference is made to chapter 5(section II, paragraph 4.2).
The growth in SIs is, among other things, the result of SIs being an eligible venue under the MiFID II share trading-obligation and being the responsible party for publishing trades through an APA. The status of SIs is part of the ESMA MiFID II Review. In short, ESMA recommends to introduce stricter pre-trade transparency requirements for SIs in order to enhance transparency and the level playing field with RMs and MTFs. For an examination of the ESMA MiFID II Review, reference is made to chapter 5(section VII).
High frequency traders, performing the role of electronic liquidity providers, use what is referred to as a passive strategy. The passive strategy seeks to earn from differences in the spread (bid versus offer) and the rebates paid by trading venues to provide liquidity. For the sake of completeness, high frequency traders can also deploy active strategies. An active high frequency trading strategy entails monitoring the routing of large orders, aiming to trade ahead of it, anticipating future market impact. Hybrid strategies are also possible (e.g. an electronic liquidity provider detecting a large order) (Oliver Wyman, The Hidden Alpha in Equity Trading: Steps to Increasing Returns with the Advanced Use of Information, p. 8).
The Trade (H. McDowell), ‘The ELP SI Debate’, 30 October 2018 (available at: https://www.thetradenews.com/elp-si-debate/).
CFA Institute (S. Rosov), ‘MiFID II and Systematic Internaliser: If Only Someone Knew This Would Happen)’, 13 July 2018 (available at: https://blogs.cfainstitute.org/marketintegrity/2018/07/13/mifid-ii-and-systematic-internalisers-if-only-someone-knew-this-would-happen/).
MiFID II refers to ‘matched principal trading’ as a transaction where the facilitator interposes itself between the buyer and the seller to the transaction in such a way that it is never exposed to market risk throughout the execution of the transaction, with both sides executed simultaneously, and where the transaction is concluded at a price where the facilitator makes no profit or loss, other than a previously disclosed commission, fee or charge for the transaction (art. 4(1)(38) MiFID II).
Art. 16a Commission Delegated Regulation 2017/2294.
Another effect of technological innovation is the rise of new types of venues. As explained above, during the timeframe of the ISD so-called alternative trading systems and order internalising systems emerged, being new venues alongside RMs.1 The growth of alternative trading systems (ATSs) and order internalising systems had the risk of harming the level playing field, as well as reducing price formation due to their limited transparency and the increase liquidity fragmentation.2 The EU addressed the rise of alternative trading systems and order internalising systems through introducing MTFs and SIs under MiFID I.
Technological innovation also resulted in new venues under MiFID I, among which the so-called broker crossing networks. Broker crossing networks did not classify as MTFs or SIs. This meant that lighter transparency obligations applied to broker crossing networks, in particular when it came to pre-trade transparency.3 Broker crossing networks had, similar to alternative trading systems and order internalising systems under the ISD, the potential to harm the level playing field and price formation, albeit that their number under MiFID I was relatively low.4 In a nutshell, the EU requires broker crossing networks to be authorised as an RM, MTF, or SI under MiFID II.5 Under MiFID II there has been a substantial increase in SIs.6 Banks have traditionally operated SIs, under both MiFID I and MiFID II. Due to technological innovation, so-called electronic liquidity providers (ELPs) – in particular high frequency traders7 – are also more and more operating SIs, alongside the traditional banks.8
In a reaction to the new rules of MiFID II, several market participants intended to provide technological innovation through designing an SI with an automated quoting system. The automated quoting system would (a) have quote feeds from various sources (including other SIs) that would (b) go into an execution engine that (c) automatically selects the most desirable execution outcome for the client order.9 Whilst innovative, the EU considers that such an automated quoting system would result in SIs operating on a matched principal basis (back-to-back trading). This would mean that the SIs would take no actual position risks.10 Given the similarities of such a system with certain broker crossing networks under MiFID I, the EU has responded to this situation. The EU clarified that matching arrangements with entities outside the own group of the investment firm are not permitted, provided the matching occurs on a de facto riskless back-to-back basis.11