EU Equity pre- and post-trade transparency regulation (LBF vol. 21) 2021/13.IV.5:13.IV.5 Publication of unexecuted client limit orders

EU Equity pre- and post-trade transparency regulation (LBF vol. 21) 2021/13.IV.5

13.IV.5 Publication of unexecuted client limit orders

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MiFID II, similar to MiFID I, requires investment firms to disclose unexecuted client orders in shares that are immediately executable under certain conditions.1 A MiFIR Delegated Regulation specifies the different methods through which an investment firm can be deemed to have met its obligation. MiFID II changes several aspects of the publication methods compared to MiFID I. The differences are the following:

1.

MiFID II permits investment firms to publish the unexecuted client limit order by submitting the order for execution to an RM or MTF.2 Although a similar requirement was in place under MiFID I, MiFID II does not require the RM or MTF to operate a given trading system (i.e. an order book under MiFID I).3 The MiFID II requirement is in effect more lenient, since all trading systems are permitted for disclosure. The MiFID II permission of submitting unexecuted client limit orders to RMs and MTFs (regardless of the trading system operated) reflects the ESMA observation that ‘(the MiFID I possibility) has fulfilled well the existing requirement’.4

2.

MiFID II also permits investment firms to publish the unexecuted client limit order through a ‘data reporting service provider located in one Member State and the order can be easily executed as soon as market conditions allow’.5 MiFID I was more lenient, since it did not require publication through a designated entity (e.g. an investment firm website could also be used, provided the client limit order could be easily executed).6

3.

MiFID II requires RMs and MTFs to be prioritised according to the firm’s execution policy to ensure execution as soon as market conditions allow.7 A similar requirement was not in place under MiFID I.8 The MiFID II requirement reflects the aim to mitigate potential conflicts of interest. Without the requirement there could, for example, be prioritisation of the RM/MTF that is part of the investment firm’s own group, rather than the more liquid markets.9

The foregoing shows that MiFID II has reduced the MiFID I possibility of using other arrangements outside RMs and MTFs. The rationale for removing investment firm websites as a possibility is that ESMA believed it to be unlikely that market participants would track all websites of investment firms seeking for unexecuted client limit orders, which resulted in a MiFID II limitation to ‘data reporting services providers’ (point 2).10 That being said, the rationale for limiting the possibilities to data reporting services providers is not entirely clear. The reference to a ‘data reporting services provider’ indicates that the publication can occur through: APAs, CTPs, or ARMs.11 The MiFID II framework for ARMs focuses on transaction reporting (i.e. reporting to the NCAs), instead of on pre- (and post-trade) data for the general public.12 ARMs are not an eligible arrangement for any other equity pre- or post-trade data publication purpose.13 This makes it striking that ARMs – in addition to APAs and CTPs (and RMs and MTFs) – can publish unexecuted client limit orders under MiFID II.

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