EU Equity pre- and post-trade transparency regulation (LBF vol. 21) 2021/4.II.1.3.2:4.II.1.3.2 Calibration to the trading system

EU Equity pre- and post-trade transparency regulation (LBF vol. 21) 2021/4.II.1.3.2

4.II.1.3.2 Calibration to the trading system

Documentgegevens:

mr. J.E.C. Gulyás, datum 01-02-2021

Datum: 01-02-2021
Auteur: mr. J.E.C. Gulyás
JCDI: JCDI:ADS267170:1
Vakgebied(en): Financieel recht / Bank- en effectenrecht
Financieel recht / Europees financieel recht
Financiële dienstverlening / Financieel toezicht

The MiFID I Implementing Regulation specified the meaning of the current bid and offer prices and the depth attached to those prices that RMs and MTFs needed to publish. Similar to the informal guidance of FESCO and CESR under the ISD, MiFID I adjusted (i.e. ‘calibrated’) the pre-trade transparency requirements to the trading system the RM or MTF used. MiFID I distinguished between four trading systems. The four trading systems were: (1) continuous auction order-driven; (2) quote-driven; (3) periodic auction; and (4) trading systems not covered by points (1-3).1 MiFID I therewith covered two order-driven systems (also ‘auctions’), namely a continuous matching system (also ‘a central order book’) (system 1) and a periodic matching system (system 3), and one quote-driven system (system 2).2 Trading systems not qualifying as an order-driven or quote-driven system fell in the residual category (system 4). MiFID I specified the meaning of the trading systems through the MiFID I Implementing Regulation (see below).3

MiFID I required the following pre-trade information to be made public per trading system:

1.: Continuous auction order-driven systems (system 1)4 needed to make public: (a) the aggregate number of orders; and (b) the shares they represented at each price level (depth). The publication needed to be for at least: (c) the five best bid and offer price levels.5
2.: Quote-driven systems (system 2)6 needed to make public the best bid and offer (i.e. two-way) quotes by price of each market maker7 in that share, together with the volumes attaching to those quotes. The quotes of the market maker needed to be firm (not: indicative). This meant that the quotes represented the actual terms on which market makers were committed to trade. In ‘exceptional market conditions’, however, indicative or one-way (i.e. bid or offer) prices were allowed for a limited time.8 MiFID I did not define ‘exceptional market conditions’. MiFID I required market makers to maintain quotes in a size that balanced the needs of members and participants to deal in a commercial size and the risk to which the market maker exposed itself.9
3.: Periodic auction trading systems (system 3) had the distinct feature that only the price that would best satisfy the trading algorithm of the system needed to be made public.10 This meant that pre-trade data was only displayed once a satisfying price was set by the algorithm. The volume that would potentially be executable at that price also needed to be displayed.11
4.: MiFID I also specified what pre-trade information needed to be made public by trading systems not covered by systems (1-3) (system 4).12 MiFID I noted that such trading systems needed to publish adequate information as to the level of orders or quotes and of trading interest. In particular, MiFID I required publication of the five best bid and offer price levels and/or two-way quotes of each market maker in the share.13

The foregoing indicates that, despite the minimum harmonised nature of the general MiFID I pre-trade transparency obligation, MiFID I introduced substantially higher pre-trade transparency obligations compared to the ISD.14

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Art. 17 MiFID I Implementing Regulation.

This distinction is based on FESCO, Standards for Alternative Trading Systems, September 2000(FESCO/00-064c), p. 5. See in this context also Harris who notes that in order-driven markets ‘(o)rder matching proceeds after the market ranks its orders. In a call market (periodic auction), this happens immediately following the market call. In a continuous market, it happens whenever a new order arrives’ (emphasis writer) (L. Harris, Trading & Exchanges: Market Microstructure for Practitioners, Oxford University Press, p. 118).

Art. 17 MiFID I Implementing Regulation.

MiFID I described a ‘continuous auction order book trading systems’ as a system that by means of (a) an order book and (b) a trading algorithm operated (c) without human intervention matched sell orders with matching buy orders on the basis of the best available price (d) on a continuous basis (Table 1 Annex II MiFID I Implementing Regulation).

Art. 17(2) and Table 1 Annex II MiFID I Implementing Regulation.

MiFID I described a ‘quote-driven trading system’ as a system where transactions were concluded on the basis of (a) firm quotes that were (b) continuously made available to participants, which required (c) the market makers to maintain quotes in a size that balanced the needs of members and participants to deal in a commercial size and the risk to which the market maker exposes itself.

MiFID I defined a ‘market maker’ as a person who held himself out on the financial markets on a continuous basis as being willing to deal on own account by buying and selling financial instruments against his proprietary capital at prices defined by him (art. 4(1)(8) MiFID I).

Art. 17(3) and Table 1 Annex II MiFID I Implementing Regulation.

Table 1 Annex II MiFID I Implementing Regulation.

10.

MiFID I described a ‘periodic auction trading system’ as a system that matched orders on the basis of (a) a periodic auction and (b) a trading algorithm that operated without human intervention (Table 1 Annex II MiFID I Implementing Regulation).

11.

Art. 17(4) and Table 1 Annex II MiFID I Implementing Regulation.

12.

MiFID I described trading systems not covered by the others as (a) a hybrid system falling into two or more of the first three systems (e.g. a combination of a periodic auction and continuous auction order-driven system) or (b) a system where the price determination process was of a different nature than that applicable to the types of system covered by the first three systems (Table 1 Annex II MiFID I Implementing Regulation).

13.

The publication of the information was only required if the characteristics of the price discovery mechanism permitted to publish such information (art. 17(6) and Table 1 Annex II MiFID I Implementing Regulation).

14.

For an examination of the ISD pre-trade transparency requirements, reference is made to section III above.