18.III.2.3.2 Price formation

Another aspect relevant for the optimal degree of equity pre- and post-trade transparency, as well as the regulatory approach (bottom-up versus top-down), is the price formation process (also: price discovery) of a financial instrument. As examined in the introductory chapter, the Commission describes price discovery as ‘the mechanism of price formation on a market, based on the activity of buyers and sellers actually agreeing on prices for transactions (…).’1 Price formation and the relation with EU equity pre- and post-trade transparency regulation is open for debate. From the ISD to MiFID II there has been EU consensus that a high degree of equity pre- and post-trade transparency is necessary for adequate price formation. At the same time, there is discussion as to what the ‘high degree’ constitutes and how it should be achieved. I emphasize three elements of the discussion. The three points concern price formation and equity pre- and post-trade transparency in relation to: (1) the type of financial instrument, (2) where the financial the instrument is traded (i.e. trading location), and (3) through which trading system.