EU Equity pre- and post-trade transparency regulation (LBF vol. 21) 2021/5.II.2.3.1:5.II.2.3.1 General

EU Equity pre- and post-trade transparency regulation (LBF vol. 21) 2021/5.II.2.3.1

5.II.2.3.1 General

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The order management facility waiver is still in place under MiFID II.1 NCAs can waive the obligation for RMs and MTFs to make pre-trade transparency public for orders held in an order management facility pending disclosure.2 The rationale of the waiver is to efficiently manage orders, such as by using a stop order, until a triggering event has occurred (e.g. the stop order limit is met). As reflected upon in the context of MiFID I, the order management facility waiver is best characterised as a semi-dark pool (also ‘grey pool’). The reason is that the MiFID II (and MiFID I) order management facility waiver supports dark orders, such as iceberg and stop orders, which become pre-trade transparent after a triggering event. After the triggering event, the orders can be executed in the pre-trade transparent segment of an RM or MTF. The combination of dark and lit elements makes the MiFID II (and MiFID I) order management facility waiver somewhat grey in nature, instead of fully dark.3

New under MiFID II is the rule-based nature of the order management facility waiver. Under MiFID I the waiver had a principle-based character. The rule-based nature of MiFID II is not apparent on level 1, but rather through binding regulatory technical standards (level 2 measures).4MiFID II sets out the type and minimum size of orders that are permitted in an order management facility. MiFID II provides the following details about the type and minimum size of orders:

The type of order held in an order management facility is an order which:

a)

is intended to be disclosed to the order book operated by the trading venue and is contingent on objective conditions that are pre-defined by the system’s protocol;

b)

cannot interact with other trading interests prior to disclosure to the order book operated by the trading venue; and

c)

once disclosed to the order book, interacts with the other orders in accordance with the rules applicable to orders of that kind at the time of disclosure.5

The minimum size of orders held in an order management facility, at the point of entry and following any amendment, needs to have one of the following sizes:

1.

in the case of a reserve order (also: iceberg order),6 a size that is greater than or equal to EUR 10.000;

2.

for all other orders (e.g. a stop order), a size that is greater than or equal to the minimum tradable quantity set in advance by the system operator under its rules and protocols.7

The foregoing list indicates that MiFID II does not limit the order management facility waiver to iceberg and stop orders. Instead, a non-exhaustive type of orders can be submitted, as long as the preconditions set out by MiFID II are met. Minimum sizes have been introduced for iceberg orders (also: reserve orders), as well as for all other orders. The specifics on the types of orders and minimum order size were not available under MiFID I. By defining the type and minimum size of orders, MiFID II leaves less discretion for RMs and MTFs in operating their order management facilities. ESMA has provided guidance for the specific use of the order management facility waiver (e.g. clarifying different types of stop orders).8

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