4.II.2 Equity pre-trade transparency waivers (dark pools)

MiFID I did not aim for complete pre-trade transparency.1 A main exception to the MiFID I pre-trade transparency obligations were the MiFID I waivers for RMs and MTFs. MiFID I permitted NCAs to waive (exempt) the MiFID I pre-trade transparency obligations for RMs and MTFs, provided certain conditions were met.2 The MiFID I waivers were available for all types of trading system (i.e. continuous auction order-driven, quote-driven, periodic auction, and residual trading systems). The MiFID I waivers resulted in segments of trading on RMs and MTFs that did not display pre-trade transparency to the market as a whole (dark pools).3

The MiFID I waivers (and therewith the existence of dark pools) were in place to find a balance between both a high degree of pre-trade transparency and ensuring that liquidity on RMs and MTFs would not be impaired.4 On the one hand, the MiFID I waivers could harm the price discovery mechanism, enhance information asymmetry, and increase volatility, since certain pre-trade information was not made public.5 That being said, the MiFID I waivers would enable investment firms to trade on the RM or MTF without displaying potential trading interest to the larger market place, that is – outside the dark pool.6 The MiFID I waivers facilitated different sorts of trading needs. The trading needs included, among other things, the reduction of so-called market impact from large orders, the ability to negotiate a better deal in the dark segment, as well as to obtain so-called price improvements.7

MiFID I provided four waivers, namely: (1) the reference price waiver, (2) the negotiated trade waiver, (3) the order management facility waiver, and (4) the large in scale waiver. The reference price and negotiated trade waiver (points 1-2) related to pre-trade transparency exceptions for certain systems that RMs and MTFs used. The order management facility and the large in scale waiver (points 3-4) concerned exceptions for certain orders as available for trading on RMs and MTFs. NCAs could grant the waivers provided that the MiFID I conditions were met (waiver process).