18.III.2.4 Preferences of market participants

A central aspect of a market structure are its market participants. Market participants refer to the so-called buy-side, sell-side, and issuers of financial instruments.1 Issuers are public companies that deliver their financial instruments to investors in public markets through primary market transactions.2 From the ISD to MiFID IIno pre- and post-trade transparency rules applied to the primary market transactions.3 In view of the EU, equity pre- and post-trade transparency rules only apply to so-called secondary market transactions, being financial instruments that have been admitted to trading on an RM or MTF or that are traded on such a venue (see paragraph above). Distinct transparency rules apply to primary market transactions.4 The latter does not mean that equity pre- and post-trade transparency rules are not important for issuers. In fact, equity pre- and post-trade transparency rules influence how financial instruments are traded by the buy- and sell-side.

The buy-side refers to entities that are involved in making investment decisions, such as retail and institutional investors. The sell-side facilitates the decision making of the buy-side, among other things, through providing liquidity by trading on own account or matching opposing client orders.5 Equity pre- and post-trade transparency can – if calibrated appropriately – support liquidity and price formation, thereby creating an efficient market. Liquidity and price formation in the secondary market benefit not only the buy- and sell-side,6 but also issuers due to cost reductions in raising capital in the primary market. The reason for this is that liquidity and price formation enable the buy- and sell-side to transfer a financial instrument after its issuance (primary market) with other market participants in the secondary market more easily.7 There is thus a direct link between the primary and secondary market, including the equity pre- and post-trade transparency available. Given the emphasis of the EU equity pre- and post-trade transparency rules on secondary markets, the next paragraphs focus on the buy- and sell-side only (not: issuer costs in the primary market).

As illustrated throughout this research, the EU has traditionally preferred a high degree of pre- and post-trade transparency for market participants, both buy- and sell-side.8 Already under the ISD a high degree of equity pre- and post-trade data publication was required under national law (and some minimum harmonised ISD standards), a situation that became institutionalised in EU regulation with MiFID I, and in particular MiFID II. Ever since MiFID I, EU equity transparency rules have applied regardless whether potential (pre-trade) and actual transactions (post-trade) took place on RMs, MTFs, SIs, or outside such venues. At the same time, the EU acknowledges that there may be circumstances where (equity) pre- and post-trade transparency publication can impair liquidity by requiring risk positions to be made public.9 The EU has therefore permitted several exceptions to the equity pre- and post-trade transparency rules. The exceptions have been adjusted in order to support specific market needs. The relation between transparency exceptions and market needs are examined below.