5.VII.3.3.2 Interim conclusion

ESMA considered to remove SIs as eligible venues from the MiFID II share trading-obligation, or at least to limit SIs being eligible only for illiquid shares. Looking at the ESMA consultation from a historical point of view, ESMA considered options somewhat similar to the ISD, being the (optional) ISD requirement to concentrate trading on RMs (MTFs did not exist at the time). The debate has become traditional in EU equity pre-trade transparency regulation. Already in drafting the ISD it was contentious whether trading should be concentrated on highly transparent RMs or instead permit less transparant, but more diverse trading functionalities (under the ISD ‘order internalising systems’ and ‘alternative trading systems’). In contrast to the ISD, the EU choose a highly diverse trading landscape under MiFID I, the latter being somewhat overturned under MiFID II with the share trading-obligation.

It might be true, as ESMA claimed in the ESMA consultation, that EU share markets have sufficiently matured and hence limiting competition in share trading, in order to pool liquidity and enchance transparency, should be the way forward. On the other hand, a variety in pools of liquidity – including SIs – might be necessary to accommodate different market preferences in share trading. Another counter argument is that limiting competition by regulation is not necessary where levels in share trading already move to RMs and MTFs by themselves, for example, as illustrated recently due to volatility because of COVID-19 (although it is uncertain whether the COVID-19 effect to RMs and MTFs is sufficient and permanent). Economic analysis is required to determine the optimal balance for the EU share market. What matters for EU equity pre-trade transparency regulation is to see the perspectives the EU can take concerning market setting (i.e. concentrated versus diverse, and often fragmented, liquidity). ESMA revived the market structure debate by means of the ESMA consultation. Clearly, the large majority of respondents to the ESMA consultation is not (yet) ready to return to an ‘ISD-like’ market structure. Along similar lines, ESMA provided its final proposal. ESMA does not recommend to remove SIs as eligible venues for the purposes of the MiFID II share trading-obligation. The final ESMA view can be seen as a small victory for the less pre-trade transparent SIs (compared to RMs and MTFs). ‘Small’, because as noted above, many of ESMA’s other proposals look to tighten the SI equity pre-trade transparency regime.