2.VIII Conclusion

The beginning of this chapter examined what equity pre-trade transparency is. The conclusion is that (equity) pre-trade transparency refers to (1) the publication of (2) trade reports on potential trades in financial instruments (ex ante). Pre-trade transparency regulation entails the mandatory publication of pre-trade information, which contrasts with voluntary publication. The chapter then set out that pre-trade data can include several types of pre-trade information. Types of pre-trade information can be divided in terms of (a) coverage, (b) speed, (c) depth, and (d) identity disclosure (or anonymity). The types of pre-trade data required in a market place depend on several factors. Main factors include (i) the needs of different data users and (ii) the trading functionalities available in the market. Over the past decades, equity trading has shifted from open outcry to mainly electronic markets. Main effects of this shift are faster pre-trade data publication and smaller order sizes. In addition, pre-trade information under EU regulation is overall anonymous (save for SI publication).

The chapter then examined the concept of dark liquidity. Dark liquidity refers to pre-trade data about liquidity that is not public. Dark liquidity can arise due to (a) legal exceptions or (b) non-applicability of pre-trade transparency obligations. Dark pools are a sub-category of dark liquidity. Dark pools refer to pre-trade data that is not public due to MiFID I/MiFID II waivers for RMs and MTFs. Dark pools are in effect a species of the genus dark liquidity.

The final conclusion of this chapter is that the ‘optimal’ degree of equity pre-trade transparency supports the optimal amount of liquidity and investor protection. Setting the right equity pre-trade transparency standard is challenging. The reasons for this are (i) different types of investors and financial instruments and (ii) whether the standard should be set through market forces (bottom-up), regulatory intervention (top-down), or a combination of both.

As will be shown below, the EU has in the past decades shifted from a bottom-up towards a highly top-down approach for EU equity pre-trade transparency regulation (i.e. a great extent of EU regulation for equity pre-trade transparency). While doing so, the EU intends to leave room for market forces (bottom-up elements). This is because: (1) the EU rules are calibrated to different types of market entities/systems (e.g. RMs and SIs) and (2) the EU sets a minimum standard of equity pre-trade transparency (regulated entities can voluntarily publish equity pre-trade data beyond the EU standard). The EU regime might become (even) more top-down after the MiFID II Review.