13.VII Conclusion about the development from the ISD to MiFID II

On the whole, chapters 10-13 (Part III) show that from the ISD to MiFID II the EU moved from a bottom-up to a more top-down approach with respect to publication and consolidation of equity pre- and post-trade data. The main reason for the increase is the EU objective of establishing an integrated European capital market. The increase in competition resulted in fragmented liquidity which the EU believed required compensation in the form of high-quality equity pre- and post-trade data publication and consolidation. The increase in EU regulation is inherently linked to the EU equity market setting, namely: (a) a concentrated versus (b) a competitive and in effect often fragmented market.

The link between the increase in EU regulation and the EU equity market setting is visible from the ISD to MiFID II. Under the ISD, publication and consolidation of equity pre- and post-trade data were primarily the domain of RMs. National law, as supplemented by RM rulebooks, provided the rules, instead of a harmonised EU approach (bottom-up). The ISD’s bottom-up approach was successful in terms of data quality. RMs monitored the published equity pre- and post-trade data carefully. In addition, since trading was concentrated on RMs, market participants often had a consolidated view of trading activity. There were also negative elements of the ISD framework. Market forces were not able, or at least not fast enough, in providing common publication standards. This posed a barrier to consolidation where an equity instrument was traded on multiple platforms (although fragmentation was limited compared to MiFID I and MiFID II). The EU also believed that the successful elements of the ISD relied on a costly precondition, that is – limited competition in the area of order execution and data services.

MiFID I did not take the preconditions of the ISD for granted. MiFID I introduced a competitive equity market setting, which would require rethinking of the EU in terms of equity pre- and post-trade data publication and consolidation. To counter fragmentation risks, MiFID I introduced a strict pre- and post-trade transparency regime for shares admitted to trading on an RM. MiFID I mainly relied on market forces to provide for high quality equity pre- and post-trade data consolidation. ‘Mainly’, because the formal text of MiFID I covered some top-down elements to facilitate reliable, comparable, and available data from the arrangements making the MiFID I equity pre- and post-trade data public.1 CESR complemented the MiFID I text. In a series of guidelines and recommendations, CESR provided EU direction on data quality, publication arrangements, and the availability of data. The result was a hybrid form of regulatory intervention. The mainly bottom-up MiFID I-text was supplemented by top-down approach of CESR, albeit in a tentative and formally non-binding way. The MiFID I-rules, including CESR guidelines and recommendations, did not succeed in ensuring a reliable overview of trading activity. In hindsight, MiFID I put too much emphasis on market forces to ensure a reliable and accessible overview of trading activity. Although market forces provided services in this area, these were not of a quality that fully satisfied the market, especially not for equity post-trade data.

In a reaction to MiFID I, MiFID II intends to have the best of both worlds (ISD and MiFID I). Under MiFID II competition among trading platforms is permitted (albeit that share trading requires some concentration), while top-down elements are introduced to facilitate a reliable and accessible overview of trading activity in the fragmented market place. The top-down elements of MiFID II are in particular evident in the MiFID II regime for equity post-trade publication and consolidation. MiFID II has introduced APAs and CTPs, being authorised data reporting service providers that have the core task of publishing and consolidating equity post-trade data. The EU intends to hedge the risk of excessive regulation by permitting competition among APAs, respectively CTPs, as well as from non-CTPs. Accordingly, MiFID II can be characterised as a big push, rather than a complete EU mandate, towards a reliable and accessible overview of equity post-trade data.

MiFID II is less intrusive in the area of equity pre-trade publication. MiFID II provides choice in the publication services for equity pre-trade data, which reflects the earlier MiFID I-regime. Nonetheless, MiFID II also introduces top-down elements. APAs (and ARMs) can provide additional publication services in the area of equity pre-trade data.2 In addition, several rules have been introduced to ensure reliable, comparable, and accessible publication of SI quotes. MiFID II is also less top-down for equity pre-trade consolidation compared to the MiFID II regime for equity post-trade data. Similar to MiFID I, MiFID II relies on industry-led initiatives to provide a consolidated quote for equity pre-trade data. Two things have changed compared to MiFID I. First, MiFID II introduces several preconditions to support the establishment of consolidated equity pre-trade data services. The most notable example is the MiFID II requirements for publication arrangements, such as APAs. Second, MiFID II permits (not: obliges) CTPs to provide additional services in the area of equity pre-trade consolidation.3

Three main aspects of the MiFID II regime for equity pre- and post-trade data publication and consolidation are currently under review. The first and most important aspect is that there is no CTP authorised under MiFID II. ESMA argues in favour of establishing a single CTP, including other key factors to ensure the CTP can be set up (data quality, mandatory contribution, mandatory consumption, and so forth). The Commission is also examining the possibility in setting up a CTP. The second and related aspect is the potential establishment of a consolidated quote. The Commission observes the need for a consolidated quote, although the setting up of a consolidated quote seems even more complex compared to the establishment of a CTP. Third, and finally, there is Brexit. The ESMA Review suggests that – despite Brexit – there is support among certain data users in setting up an EU27 CTP (in particular where UK data would be included). The situation of Brexit is, however, difficult to judge given the political uncertainty. What can be said from a more general point of view is that ESMA and the Commission do not discard the fragmented EU equity market setting per se. While ESMA and the Commission consider options for a more concentrated market setting (reducing issues with the lack of a CTP),4 ESMA and the Commission also acknowledge the positive effects of competition (e.g. reduced explicit trading costs). In case the competitive equity market setting of the EU is retained (including the degree of fragmentation), ESMA and the Commission seem willing to introduce a CTP (or even a consolidated quote) where deemed necessary.