EU Equity pre- and post-trade transparency regulation (LBF vol. 21) 2021/18.IV.1.3.4:18.IV.1.3.4 MiFID II Review: equity pre-trade transparency on RMs and MTFs

EU Equity pre- and post-trade transparency regulation (LBF vol. 21) 2021/18.IV.1.3.4

18.IV.1.3.4 MiFID II Review: equity pre-trade transparency on RMs and MTFs

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ESMA observes that the level of equity pre-trade transparency on RMs and MTFs can be examined in two ways. First, by comparing the equity pre-trade transparency available before and after the application of MiFID II. ESMA concludes that – given that MiFID I was limited to shares admitted to trading on an RM (i.e. a narrower scope) – the level of pre-trade transparency has increased following the application of MiFID II.1

Although positive, ESMA is not optimistic about the second way of observing RM/MTF equity pre-trade transparency levels. The second way concerns comparing (a) the volume and number of orders that are subject to real-time equity pre-trade transparency with (b) the equity orders that benefit from a MiFID II RM/MTF waiver. ESMA observes that the trading volume on RMs/MTFs has increased following application of MiFID II, but not enough to compensate the increase in volume executed under the RM/MTF equity pre-trade transparency waivers.2 ESMA also observes growth in frequent batch auctions that, in view of ESMA, publish insufficient pre-trade data. ESMA proposes a stricter regime in order to ensure RMs and MTFs are more equity pre-trade transparent (lit). Key proposals of ESMA are the following:

1.

ESMA proposes, in order to address the ongoing high volume of dark trading on RMs and MTFs, to assign a certain order size to orders being eligible for the reference price waiver.3

2.

ESMA proposes, in order to address the large number of ETFs being eligible for the large in scale-waiver, to increase the pre-trade large in scale threshold for ETFs.4

3.

ESMA proposes, if the double volume cap mechanism is maintained, to simplify the mechanism and to make it stricter (i.e. increase pre-trade transparency). ESMA proposes to remove one threshold of the volume cap mechanism, namely of four percent on the individual RM/MTF level and the related obligation of RMs and MTFs to monitor that dark trading does not exceed the four percent threshold.5 ESMA proposes such a single volume cap in order to make the current regime simpler. At the same time, ESMA proposes to reduce the current eight percent threshold of overall trading taking place under the volume cap mechanism to seven percent. The intention here is to enhance the degree of equity pre-trade transparency compared to the current MiFID II regime.6

4.

ESMA recommends that the double volume cap includes an EU approach (top-down) for infringements of double volume cap suspensions. The aim here is to ensure a consistent EU approach – instead of a national one – for breaches of double volume cap suspensions.7

5.

ESMA proposes introducing two distinct definitions, namely a definition for: (1) conventional periodic auctions and (2) frequent batch auctions. ESMA proposes distinct pre-trade transparency requirements for frequent batch auctions in order to ensure the current MiFID II regime accommodates the rise of frequent batch auctions under MiFID II. ESMA also proposes more generally to define ‘non-price forming transactions’ in order to ensure there is sufficient legal clarity about non-price forming trading systems (including certain frequent batch auctions).8

The ESMA proposals are overall top-down in the sense that more EU regulation is proposed to enhance the degree of equity pre-trade transparency across RMs and MTFs, as well as a common approach for infringements. Whilst it is true that ESMA proposes to remove one of the double volume cap thresholds (i.e. bottom-up), ESMA intends to compensate its proposal by suggesting a stricter EU threshold (seven, instead of eight, percent). Besides these proposals, ESMA examines closing auctions on RMs and MTFs in the ESMA MIFID II Review. Closing auctions are periodic auctions that take place at the end of the trading day of an RM or MTF. The proportion of shares traded during closing auctions increased steadily over the last few years. The result is, among other things, that specific equity pre-trade transparency rules apply, namely: the MiFID II rules applicable to periodic auctions, rather than those of, for example, continuous order-driven markets. At the moment, ESMA proposes a wait-and-see approach. ESMA proposes to closely monitor the evolution of closing auctions and the possible negative impacts may be addressed by market participants via market driven measures (bottom-up).9

The Commission seeks to verify the ESMA observations and whether or not stakeholders agree with ESMA. Responses to the ESMA consultation reveal that the ESMA proposals are controversial, in particular those stakeholders emphasizing liquidity provision through dark trading.10 Looking at some of the responses to the ESMA consultation, it appears that the increased use of closing auctions does not relate to the MiFID II equity pre-trade transparency regime. Instead, the increase is believed to be for other reasons, such as market participants wanting access to as much liquidity as possible and/or passive investment strategies (ETFs). About half of the respondents to the ESMA consultation agree with the final ESMA view that monitoring, rather than regulatory intervention, is necessary at this stage.11

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