18.IV.2.1 Situation under the ISD

Under the ISD the EU relied on national law and market forces (bottom-up) to ensure adequate comparison of (equity) pre- and post-trade data. A main reason here was the concentrated market setting permitted under the ISD. The ISD concentration-rule, as well as national rules requiring trades to be reported to an RM, enabled Member States to require equity pre- and post-trade data to be consolidated on one or a few RMs.1 Where trading in a financial instrument was fragmented, RMs and/or data vendors offered consolidation services.2 One benefit of the ISD approach was that market participants overall had a consolidated view of trading in a given equity instrument.3 Another benefit was that, since RMs monitored data to be reliable and published in real-time, (equity) pre- and post-trade data was as a general rule of high quality and timely.4 In those Member States where trading in an equity instrument was fragmented across multiple venues, RMs and/or data vendors often consolidated the fragmented data.5 Here, the bottom-up approach of the ISD, leaving national law and market forces to decide on data publication and consolidation, can be described as successful.

Three comments need to be made here. As illustrated in the previous chapters, the ISD situation was not perfect. First of all, market forces were not able to adopt common publication standards and formats, which posed a barrier for consolidation. A factor here was the dominance of RMs in dictating the publication standards to be used. Common publication standards, or better stated: the lack thereof, was an area in which the bottom-up approach of the ISD was not fruitful.6 Second, the consolidated view of trading activity was only possible due to restrictions of the ISD and national law on competition, both in terms of trading and the data generated from the trades. Accordingly, the successful elements of the bottom-up approach of the ISD can mainly be attributed to the ISD concentration-rule and protectionist national law. The result was limited competition in trading, as well as in publication and consolidation, services. Third, consolidation services for financial instrument traded across multiple venues were mainly available for so-called blue chip shares (shares with a good reputation).7 Shares in certain companies, in particular small or medium-sized enterprises (SME-shares), were not necessarily included in consolidation services. The result could be a less efficient allocation of capital for such (SME-)shares.8

In sum, experience with the ISD teaches us that a bottom-up approach for publication and consolidation can be successful in some areas, but that its achievements can come at a (too) high cost. A necessary precondition under the ISD was concentration of trading on one (or a few) trading platforms, thereby hindering competition, innovation, and investor choice. As shown below, the EU did not take this precondition for granted for MiFID I. MiFID I introduced a competitive market setting. The competitive market setting required a new EU strategy for data publication and consolidation services.