4.II.2.3.1 General

A third waiver available under MiFID I was the order management facility waiver. The order management facility waiver was in place for certain types of orders. Order management facilities allow orders to be managed more efficiently. Order management facilities do so by permitted for dark orders (orders that are not pre-trade transparent). Main examples of dark orders in MiFID I order management facilities were iceberg and stop orders. An iceberg order only shows a fraction of the actual price and size to other market participants (i.e. pre-trade transparency) while the rest of the order remains hidden in the order management facility (i.e. pre-trade opaque). Once the pre-trade transparent fraction of the order is executed, the hidden size (of the rest of the ‘iceberg’) becomes gradually apparent to the public.1 An iceberg order permits investors to hide pre-trade information and protect orders from information leakage.2 A stop order refers to an instruction to buy (or sell) only once the price has risen to (fallen to) a certain level.3 A stop order is not pre-trade transparent until the stop price has been met.4 A sell stop order can be used to limit losses on holding a share if the price drops quickly.5 A buy stop order can be used to profit from a rise in a share price. This can, for example, be useful to protect against a loss coming from a so-called short position (i.e. profit from the decline in share prices).6

A striking feature of iceberg and stop orders is that they are only made pre-trade transparent once a trigger event has been surpassed. Before the triggering event, the orders remain dark.7 Once the triggering event occurs, the iceberg or stop order is made pre-trade transparent and available for execution in the lit market, that is – the pre-trade transparent segment of the RM or MTF, such as the continuous order-driven system.8 Accordingly, the MiFID I order management facility waiver covered both a dark and a lit aspect. Initially dark iceberg and stop orders were made pre-trade transparent after the triggering event and were then (i.e. after the triggering event) executed in the pre-trade transparent segment of the RM or MTF. In other words, the MiFID I order management facility waiver supported relatively lit ‘dark pools’.

MiFID I encompassed a broad mandate for NCAs in granting the order management facility waiver. MiFID I noted that waivers based on the type of orders could be granted ‘in relation to orders held in an order management facility maintained by the RM or the MTF pending their being disclosed to the market’.9 MiFID I did not provide definitions or guidance on what order management facilities were, how they needed to be designed, and what type of orders could be held (iceberg and stop orders were commonly used, but other types of dark orders could also fall within the scope).10 The main MiFID I requirement was that orders in the order management facility needed to be disclosed to the market at a certain point (i.e. after a triggering event). This meant that purely dark orders, that is – orders that would never be visible to market participants before execution, were not possible under the MiFID I order management facility waiver.11