EU Equity pre- and post-trade transparency regulation (LBF vol. 21) 2021/4.II.2.4.1:4.II.2.4.1 General

EU Equity pre- and post-trade transparency regulation (LBF vol. 21) 2021/4.II.2.4.1

4.II.2.4.1 General

Documentgegevens:

mr. J.E.C. Gulyás, datum 01-02-2021

Datum: 01-02-2021
Auteur: mr. J.E.C. Gulyás
JCDI: JCDI:ADS266646:1
Vakgebied(en): Financieel recht / Bank- en effectenrecht
Financieel recht / Europees financieel recht
Financiële dienstverlening / Financieel toezicht

The fourth and final waiver under MiFID I was the large in scale waiver. The waiver resulted in large orders (also informally referred to as ‘block trades’) not being subject to the pre-trade transparency obligations of the RM or MTF in question.1 The large in scale waiver was designed to protect large orders from adverse market impact (abrupt price movements).2 Consider the example where a large order of a pension fund would create an intense reaction to the market price where the order would be made pre-trade transparent.3 Pre-trade transparency concerning the large order could result in higher costs for the pension fund (so-called market impact) compared to when the order would remain dark.4 While volatility is not by definition negative (i.e. it create trading opportunities),5 it can harm financial markets (including liquidity) due to the increase of risks.6 MiFID I aimed to soften the pre-trade transparency risks of large order publication (i.e. market impact and volatility) through the large in scale-waiver.7

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Art. 29(2)(3)(b) and art. 44(2)(3)(b) MiFID I and art. 20 MiFID I Implementing Regulation.

ESMA, Discussion Paper: MiFID II and MiFIR, 22 December 2014, p. 72.

This example is based on D. Busch, ‘MiFID II and MiFIR: stricter rules for the financial markets’, Law and Financial Markets Review, 2017, p. 10.

Where the large order of the pension fund would be pre-trade transparent, other market participants could reset or adapt their orders (e.g. moving up or down the price limit, changing the size of the order, removing their orders, and so forth), thereby increasing the costs of trading for the pension fund (ESMA, Discussion Paper: MiFID II/MiFIR, 22 May 2014(ESMA/2014/548), p. 52).

L. Harris, Trading & Exchanges: Market Microstructure for Practitioners, Oxford University Press, 2003, p. 410-416 and p. 555. See, for example, S. Patterson and A. Osipovich, ‘High-Frequency Traders Feast on Volatile Market’, Wall Street Journal, 27 March 2020 (available at: https://www.wsj.com/articles/high-frequency-traders-feast-on-volatile-market-11585310401).

L. Harris, Trading & Exchanges: Market Microstructure for Practitioners, Oxford University Press, 2003, p. 410-416 and p. 555.

ESMA, Discussion Paper: MiFID II and MiFIR, 22 December 2014, p. 72. For the sake of completeness, enabling large orders to remain dark can also enhance volatility. The reason here is that the pre-trade transparent part of the market contains less depth (i.e. the large order is not part of the pre-trade transparent market), which can increase price swings. As a consequence, the aim is to find a balance between the advantages and disadvantages of (a) whether or not to publish the large order and, if so, (b) in which size orders can remain dark (ibid).