Einde inhoudsopgave
EU Equity pre- and post-trade transparency regulation (LBF vol. 21) 2021/3.II.5.1
3.II.5.1 Different market structures
mr. J.E.C. Gulyás, datum 01-02-2021
- Datum
01-02-2021
- Auteur
mr. J.E.C. Gulyás
- JCDI
JCDI:ADS266814:1
- Vakgebied(en)
Financieel recht / Bank- en effectenrecht
Financieel recht / Europees financieel recht
Financiële dienstverlening / Financieel toezicht
Voetnoten
Voetnoten
This distinction is based on B. Scott-Quinn, ‘EC Securities Markets Regulation’, in B. Steil (Ed.), International Financial Market Regulation, 1994, p. 121, 123-131. For a detailed analysis of the roots of the ISD, reference is made to the 1977 Wymeersch study. Instead of two, Wymeersch distinguished between three types of market patters in Europe (Northern, Southern, and Central Member States) based on the structure, access requirements and operational rules (E. Wymeersch, Control of Securities Markets in the European Economic Community, Collection Studies. Competition – Approximation of Legislation Series, 1977).
Reference is made to N. Moloney, EC Securities Regulation, Oxford EC Law Library, 2002, p. 650-651.
Reference is made to N. Moloney, EC Securities Regulation, Oxford EC Law Library, 2002, p. 650-651.
Reference is made to B. Steil, European Equity Markets: The State of the Union and an Agenda for the Millennium, ECMI, 1996, p. 32.
Reference is made to B. Steil, European Equity Markets: The State of the Union and an Agenda for the Millennium, ECMI, 1996, p. 31.
The main topics included access, transparency, and concentration-requirements. The element of access is not examined here. Reference is made to G. Warren III, The European Investment Services Directive, 15 U. Pa. J. Int’l L. 181, 1995, p. 207-216. See in this context also G. Ferrarini and F. Recine, ‘the MiFID and Internalisation’, in G. Ferrarini and E. Wymeersch (Eds.), Investor Protection in Europe: Corporate Law Making: The MiFID and Beyond, Oxford University Press, 2006, p. 271-296.
Commission, White Paper from the Commission to the European Council: Completing the Internal Market, 14 June 1985(COM(85) 310 final), p. 29.
The Southern Member States also proposed that RMs would be subject to formal listing requirements for financial instruments (B. Steil, European Equity Markets: The State of the Union and an Agenda for the Millennium, ECMI, 1996, p. 116 and p. 121).
N. Moloney, EC Securities Regulation, Oxford EC Law Library, 2002, p. 663.
B. Steil, European Equity Markets: The State of the Union and an Agenda for the Millennium, ECMI, 1996, p. 125.
B. Steil, European Equity Markets: The State of the Union and an Agenda for the Millennium, ECMI, 1996, p. 116.
B. Scott-Quinn, ‘EC Securities Markets Regulations’, in B. Steil (Ed.), International Financial Market Regulation, 1994, p. 136.
B. Steil, European Equity Markets: The State of the Union and an Agenda for the Millennium, ECMI, 1996, p. 116.
Where the market maker’s post-trade data is immediately published, other market participants are able to drive down the value of the position held (e.g. by taken positions unbeneficial to the market maker). The result could be harmed liquidity as provided in the quote-driven markets (See Scott-Quinn, ‘EC Securities Markets Regulation’, in B. Steil (Ed.), International Financial Market Regulation, 1994, p. 136).
The first element was the difference in market structures across the Member States. Broadly speaking, a distinction could be made between the Southern versus Northern Member States.1 The markets of the Southern Member States were characterised by: (a) highly concentrated trading (often mandated by concentration requirements); (b) order-driven markets; and (c) a great degree of public intervention as to the operation of the market (among other things, the degree of transparency published).2 By contrast, the markets of the Northern Member States: (i) did not require the concentration of trading; (ii) were mainly quote-driven; and (iii) liberal as to the operation of the market (among other things, the degree of transparency could, within certain boundaries, be determined by the market itself).3 When it came to post-trade transparency, the level of transparency tended to be considerably higher on the order-driven markets (Southern Member States) compared to the quote-driven markets (Northern Member States).4 The level of pre-trade transparency varied widely across the order-driven (Southern Member States) and quote-driven (Northern Member States) markets.5
The different market structures upheld by the Southern versus Northern Member States resulted in complex negotiations on the ISD.6 In the early 1990s, before the ISD was being drafted, the Commission proposed in its White Paper that different kinds of markets, in particular ‘stock exchanges’ (later relabeled as ‘RMs’) should be able to compete with each other.7 The proposal of the Commission was at odds with the market philosophy and structure of the Southern Member States. Reflecting their interventionist market philosophy, the Southern Member States instead proposed the ISD to encompass the concentration of trading on so-called ‘RMs’. The Southern Member States also proposed that RMs would be subject to minimum standards of post-trade transparency (not: pre-trade transparency).8 The Southern Member States argued that concentrated trading, combined with post-trade transparency, would contribute to liquidity and transparency of the RM (i.e. liquidity would be concentrated on transparent RMs).9 By contrast, the Northern Member States disagreed with the concentration of trading and wanted investment firms to have choice as where to execute an order (i.e. competition in terms of order execution platforms). The Northern Member States also emphasized that the proposed transparency provisions, in focusing entirely on post-trade transparency, ignored the importance of pre-trade transparency.10
Although the commitment of both the Southern and Northern Member States to fair and efficient markets is not in question, it should be noted that both positions were also driven by national concerns.11 The Southern Member States saw both concentration and post-trade transparency rules as an effective way to regain trading that flowed to the decentralised quote-driven markets over the previous years (in particular to the UK markets).12 Instead, the Northern Member States wanted to protect their position by permitting investor choice (no concentration of trading) and by focusing on pre-trade transparency rules. Post-trade transparency would be relatively harmful for the quote-driven markets, since here the liquidity provider (i.e. market maker) would have to display its intertemporal position.13 Where post-trade data is immediately published in a quote-driven market, the future trading position of the market maker is revealed.14 The situation is different in a continuous order-driven market. Investors do not by definition (although possible) take intertemporal risk positions in a continuous order-driven market.
Despite their different views, the Southern and Northern Member States were in the end able to adopt a compromise. Both positions of the Southern and Northern Member States were reflected in the final ISD-text. The ISD provision to concentrate trading on RMs was possible, but optional and covered exceptions.15 Minimum harmonised transparency rules were introduced, with a strong emphasis on post-trade transparency. A pre-trade transparency rule was apparent, but only marginally. The ISD provided a broad pre-trade transparency obligation, as well as exceptions. The compromise position of the ISD enabled the pre-trade transparency obligations and derogations to differ according to the nature of the RMs across the EEA (e.g. continuous order-driven versus quote-driven).16 The different market structures and related different market philosophies resulted in the final ISD position. The result was a bottom-up EU approach with respect to pre-trade transparency regulation under the ISD.