5.VII.1.2.1 Reference price waiver and negotiated trade waiver

The reference price waiver and negotiated trade waiver are part of the ESMA MiFID II Review. ESMA proposes the following:

The ESMA proposals are the result of the ESMA consultation process, including feedback of respondents to the consultation. During the consultation ESMA observed a growth in the use of RM and MTF waivers, more specifically: (i) the large in scale and order management waiver (both not subject to the double volume cap). ESMA identifies that (ii) the double volume cap led to a decrease in the use of the reference price waiver and negotiated trade waiver in liquid equity instruments (both subject to the double volume cap), which are then substituted by the large in scale-waiver.2 To enhance equity pre-trade transparency, ESMA explored several options with respect to the reference price waiver and negotiated trade waiver in liquid equity instrument. The options included removing the reference price waiver and negotiated trade waiver for liquid instruments, as well as restricting the use of these waivers by means of a size threshold.3 Market participants presented mixed views on ESMA’s proposals.4

The mixed views reflected a traditional debate in EU equity pre-trade transparency regulation. The traditional debate concerns the merit of the individual RM/MTF equity pre-trade transparency waivers. ESMA observes that there is (still) broad agreement on the importance of: (a) the large in scale-waiver (i.e. mitigate volatility/market impact from large orders), (b) the order management facility waiver (i.e. orders, for example, iceberg orders ultimately become pre-trade transparent and thereby contribute to the price formation process), and (c) the negotiated trade waiver for orders subject to conditions other than the current market price (i.e. disclosure of such pre-trade data is not useful for other market participants).5 Similar to previous debate in drafting MiFID I and MiFID II, market participants have opposing views as to the merits of the reference price waiver and negotiated trade waiver for liquid equity instruments. Generally speaking, those in favour of investor protection want the reference price waiver and negotiated trade waiver for liquid equity instruments to be removed or at least be restricted to size. The argument here is that the MiFID II waivers for RMs and MTFs merely have the goal of protecting market participants against market impact.6 A reduction of the waivers to the large in scale-waiver and order management facility-waiver would also make the complex MiFID II waiver regime simpler in nature. 7 By contrast, those in favour of the reference price waiver and negotiated trade waiver for liquid equity instruments emphasized investor improvement. In their view, these waivers, among other things, allow market solutions to meet a range of execution objectives (e.g. negotiate a fair price for illiquid shares).8 Similar arguments can be identified in the MiFID I and MiFID II drafting process.9

The final ESMA position reflects a preference for the first camp. ESMA emphasizes investor protection, albeit in a relatively mild manner. ESMA proposes to limit the reference price waiver to orders above a certain percentage. ESMA stresses that protection of market participants is key in the MiFID II waiver regime (i.e. not improve trading positions by executing at midpoints with the reference price).10 The proposal of ESMA needs to be read in conjunction with another ESMA proposal, namely to remove the four percent threshold of the double volume cap (and only to retain the eight percent threshold).11 ESMA does not propose any changes for the negotiated trade waiver. The reason here includes, among other things, the ability to negotiate the fair price of certain transactions, in particular, in illiquid shares.12