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EU Equity pre- and post-trade transparency regulation (LBF vol. 21) 2021/18.III.2.4.2
18.III.2.4.2 Dark liquidity outside RMs and MTFs
mr. J.E.C. Gulyás, datum 01-02-2021
- Datum
01-02-2021
- Auteur
mr. J.E.C. Gulyás
- JCDI
JCDI:ADS267118:1
- Vakgebied(en)
Financieel recht / Bank- en effectenrecht
Financieel recht / Europees financieel recht
Financiële dienstverlening / Financieel toezicht
Voetnoten
Voetnoten
CESR defined ‘broker crossing networks’ as networks that executed client orders on an electronic basis, whether through agency crossing or by executing client orders through dealing on own account (internalisation) (CESR, MiFID I Review, July 2010(CESR/10-802)). CEPS clarifies that broker crossing networks represent linked group of broker-dealer crossing systems (or BCSs) designed to form one pool of liquidity and reach a critical mass to cross orders. For the sake of simplicity, similar to the vision of CESP, this book will use the two terms (broker crossing network and broker crossing system) interchangeably, since it is more interesting to examine their function than the modality in which they performed those services (CEPS, MiFID 2.0: Casting New Light on Europe’s Capital Markets, 2011, p. 41). For an examination of the term ‘broker crossing network’, reference is made to chapter 5(section II, paragraph 4.2).
FESCO, The Regulation of Alternative Trading Systems in Europe: A Paper for the EU Commission, September 2000(FESCO/00-064c), p. 15.
Reference is made to Commission, MiFIR Proposal, 20 October 2011(COM(2011) 652 final), p. 3.
The estimate is that dark trading outside RMs and MTFs under MiFID I accounted for approximately 40 percent (P. Gomber and I . Gvozdevskiy, ‘Dark Trading under MiFID II’, in D. Busch and G. Ferrarini (Eds.), Regulation of the EU Financial Markets: MiFID II & MiFIR, Oxford University Press, 2017, p. 364).
Recital 6 MiFIR.
Recital 19 MiFID II and art. 14-17 MiFIR.
Dark liquidity can also occur where trading takes place outside an RM or MTF. Examples include where trading takes place on an SI or so-called broker crossing network. Broker crossing networks can, but do not necessarily, internalise client orders, that is - execute a client order by trading on own account. SIs always internalise client orders.1 Since internalisation implies position risks (trading on own account), limited (or the absence of) pre-trade transparency can protect the investment firm operating a broker crossing network or SI. Under the ISD, the matter of dark liquidity outside RMs played a limited role, since trading was largely centralised on RMs. Internalisation took place, but in a limited fashion.2
From the ISD to MiFID I the EU changed its position by subjecting SIs to harmonised pre-trade transparency rules. The pre-trade transparency rules were calibrated to the position risks of internalising investment firms, since the rules only applied in relation to systematic internalisation, in liquid shares and above a standard market size.3 In hindsight, the position of the EU can be described as market-led, since broker crossing networks, which included non-systematic internalising investment firms, fell outside the scope of the MiFID I pre-trade transparency rules. However, one must realize that technological developments and regulatory arbitrage outpaced many of the MiFID I rules.4 If the EU, in particular the market-shaping philosophy, had foreseen the growth of dark liquidity outside RMs and MTFs,5 potentially a stricter pre-trade transparency regime would have been proposed for MiFID I.
Whatever the case may be, the EU has shifted towards a more market-shaping philosophy from MiFID I to MiFID II. By means of the MiFID II framework, the EU wants any trading system in financial instruments, such as broker crossing networks, to be properly regulated and authorised as an RM, MTF, or SI.6 RMs, MTFs and SIs are characterised by a high level of transparency, both pre- and post-trade. In addition, under MiFID II internalising investment firms qualify sooner as an SI. Furthermore, SIs are subject to stricter pre-trade transparency rules compared to MiFID I.7 The MiFID II Review of ESMA shows willingness of ESMA to make SIs more pre-trade transparent. Whilst not final, the ESMA view echoes market-shaping elements in drafting EU equity pre-trade transparency regulation.