4.IV.1.4 Background

The Commission proposed the client limit order display rule in drafting MiFID I. The rule would require investment firms to immediately publish unexecuted client limit orders for all financial instruments.1 In view of the Commission, limit orders had a particularly powerful price-signal, since they specified clearly the value at which an investor was willing to trade.2 The Commission stated that the client limit order display rule would ensure that investment firms would not withhold price relevant information, as embodied in the unexecuted client limit orders, from other market participants.

The Commission suggested exceptions for publication where the unexecuted order was (a) large in scale or (b) where requested by the client. The Commission proposed to align the large in scale-waiver for the client limit order display-rule and the pre-trade transparency waiver for RMs and MTFs.3 This reflected the aim to ensure simplicity in terms of (i) the RM and MTF large in scale-waiver and (ii) the large in scale exception of the client limit order display rule (i.e. a similar approach). The rationale behind the Commission’s proposed exceptions was that requiring client limit orders to be displayed could deter market participants from trading. The two exceptions (a-b) could prevent this from happening.4 Finally, the Commission clarified that the client limit order display rule would not prevent the investment firm from concluding the order in house (whether through agency crossing or internalisation),5 as long as this was done immediately and subject to the express prior consent of the client.6

The European Parliament disagreed with the Commission’s proposal.7 The European Parliament argued that other obligations, such as best execution and conduct of business rules, would already oblige investment firms to deal with client orders fairly, expeditiously, and according to their clients’ interest.8 In addition, the European Parliament believed the rule would be anti-competitive. The rule would in practice cause client limit orders to be routed via RMs, since there was no other infrastructure in place for publishing and providing access to such orders. Furthermore, the rule could cause markets to move against the client orders due to the publication of the clients’ position. The European Parliament noted that as a result trading would be more difficult and liquidity would be pushed to jurisdictions outside the EU.9

The European Parliament stated that the Commission’s exclusions for ‘orders which are large in scale compared with the normal market size’ would not help in this respect. The European Parliament believed that, given the diversity of the European markets, it would be impossible to create a single European size threshold (even through Level 2).10 Discussions on the rule followed, which finally resulted in a compromise position. A main restriction was added that the rule was limited to share trading only.11 The European Parliament also preferred clarity that a client limit order could be published ‘by forwarding the client limit order to an RM or MTF or by some other means’.12

The Council restricted the client limit order display rule (even further). First, the Council accepted the request of the European Parliament to limit the display rule to share trading only. Second, the Council added an option for Member States to decide that investment firms could comply with the obligation to make public unexecuted client limit orders public by transmitting the order to an RM and/or MTF.13 This deviated from the request of the European Parliament to permit the publication of client limit orders elsewhere.14 Instead, the Council preferred discretion for Member States to favour RMs/MTFs as publication venues for the client limit orders (Member State option). The Council agreed with aligning the ‘large in scale’-exception with the RM/MTF large in scale-waiver.15

The position of the Council was evident in the final MiFID I text. MiFID I covered a requirement for investment firms to immediately publish unexecuted client limit orders in shares under prevailing market conditions. MiFID I did not prevent the limit order to be executed internally, whether through agency crossing or internalisation, as long as this was done immediately. A Member State option was in place permitting Member States to decide that investment firms could only comply with the rule by sending the limit order to an RM and/or MTF. MiFID I aligned (a) the ‘large in scale’-exception of the client limit order display rule with (b) the RM/MTF large in scale-waiver.16