5.VII.1.3.2 Interim conclusion

Similar to the spirit present in the ESMA view on the reference price and negotiated trade waiver, including the double volume cap (paragraph 1.2 above), ESMA takes a stricter position towards frequent batch auctions and, more generally, non-price forming trading systems. Although understandable to support price formation, the ESMA view is controversial. Opponents argue that the amount of frequent batch auctions is low, frequent batch auctions do display pre-trade data, respond to a market need (e.g. protect against fast traders), and the ESMA view is too strict compared to conventional periodic auctions. What complicates the debate is the variety in frequent batch auctions. As examined in section II, there are different types of frequent batch auctions, each displaying different amounts of pre-trade data.

Looking at the debate from a holistic point of view, historical parallels are apparent with the MiFID I situation for broker crossing networks. Innovation resulted in an increase in broker crossing networks under MiFID I, simply put, platforms operated by investment firms outside the RM/MTF/SI framework. One view under MiFID I was that broker crossing networks embodied the risk of harming price formation and regulatory arbitrage (not being classified as an MTF or SI). By contrast, others argued the level of broker crossing networks was low, post-trade data was displayed (low risk of harming price formation), broker crossing networks were a response to a market need, and showed innovation.1 Furthermore, broker crossing networks were apparent in different forms. Some broker crossing networks engaged in agency crossing, some in internalisation, and some in both.2

Similar elements are apparent in the current debate on frequent batch auctions. What can be learned from the MiFID I experience is that the future direction for EU equity pre-trade transparency regulation depends on political willingness. Those in favour of broker crossing networks eventually lost the battle in the broker crossing network-debate. MiFID II requires broker crossing networks to be properly regulated as an RM, MTF or SI.3 If the political trend prolongs – which is not unlikely given Brexit – frequent batch auctions will become subject to tighter rules, similar to the ESMA view in the consultation.4