18.III.3.5 Interim conclusion

Technological innovation is the third and final factor that determines why EU equity pre- and post-trade transparency regulation increased from the ISD to MiFID II. First, technological innovation created a shift from open outcry/telephone markets to electronic markets. The result is that a broader audience gained access to equity pre- and post-trade data (in particular through the Internet) and the data is displayed in faster, but also more anonymous manner. The shift is evident in the EU equity pre- and post-trade transparency rules, which from the ISD to MiFID II have required faster and overall anonymous pre- and post-trade data publication.

Second, technological innovation resulted in new trading platforms, more specifically alternative trading systems and order internalising systems under the ISD and broker crossing networks under MiFID I. The EU response has been the introduction of MTFs and SIs under MiFID I, which since MiFID I have been subject to harmonised equity pre- and post-trade transparency rules. MiFID II tightened the classifications of both MTFs and SIs to ensure sufficient transparency.1 Technological innovation also enables new automated quoting systems of SIs (de facto being broker crossing networks) and the rise of so-called frequent batch auctions. MiFID II responded by prohibiting automated quoting systems of SIs and ESMA wants to introduce a stricter approach for frequent batch auctions in the ESMA MiFID II Review. The result has been more EU equity pre- and post-trade transparency regulation, potentially expanded even further if the ESMA proposals are accepted.

Third, technological innovation resulted in new trading techniques. Early examples of such innovation include remote access, efficient order management and reference price systems (ISD), as followed by the newer development of algorithmic trading (MiFID I and MiFID II). Remote access permitted market participants to view equity pre- and post-trade data of distant liquidity in real-time. Technological innovation also permitted better order management (e.g. efficient use of stop orders and iceberg orders) and reference prices (e.g. trade at the mid-point, instead of ‘crossing the spread’), with in particular the reference prices being controversial in terms of price formation (dark liquidity). The growth of algorithmic trading under MiFID I and MiFID II enables to take better trading decisions and also to ‘glue together’ fragmented markets through smart-order routers (SORs). A consequence of algorithmic trading is a growing demand for equity pre- and post-trade data (in conjunction with the growth in demand due to the rise of new venues resulting in fragmented markets). High frequency trading, being a subset of algorithmic trading, is both controversial and relevant for EU equity pre- and post-trade transparency regulation. On the one hand, high frequency trading can support price formation (through fast trading) and liquidity provision. On the other hand, high frequency trading has resulted in increased dark liquidity and use of frequent batch auctions (traders trying to avoid/reduce (speed advantages of) high frequency traders). The EU has responded by the stricter MiFID II regime in order to limit dark trading that arose under MiFID I. Frequent batch auctions are subject of the ESMA MiFID II Review.

Fourth, the EU increasingly uses technological innovation to make the EU equity pre- and post-trade transparency thresholds work. From the ISD to MiFID II a trend is apparent in which more data is being collected, calculated, stored and published on an EU level to ensure an EU approach for the equity pre- and post-trade transparency parameters (e.g. the MiFID II double volume cap and whether or not an investment firm qualifies as an SI). The entering into force of MiFID II was delayed with a year due to the complex technical infrastructure required, being a system that connects ESMA to 100 trading venues (and another 200 through NCAs). Current EU issues are the (lacking) data quality of the EU databases and whether or not there should be further EU expansion in terms of EU databases and EU competence in collecting, calculating, storing, and publishing data.

On the whole, technological innovation resulted in growing demand for equity pre- and post-trade data from the ISD to MiFID II, in particular due to (1) the shift to electronic markets, (2) the rise of new venues (fragmentation), and (3) new trading techniques (algorithmic trading). Technological innovation has had the paradoxical effect of dispersing liquidity (fragmentation), while at the same time ‘gluing’ the fragmented market together through algorithmic trading. The effects of technological innovation are directly linked to the increase of EU equity pre- and post-trade transparency regulation from the ISD to MiFID II. With each regulatory regime, the EU responds to new trends in trading made possible by technological innovation. Examples include new EU equity pre- and post-trade transparency regulation that requires faster equity pre- and post-trade data publication and ‘reasonable’ prices for equity pre- and post-trade data due to the growing data demand.