EU Equity pre- and post-trade transparency regulation (LBF vol. 21) 2021/5.II.2.1.1:5.II.2.1.1 General

EU Equity pre- and post-trade transparency regulation (LBF vol. 21) 2021/5.II.2.1.1

5.II.2.1.1 General

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MiFID II retains the reference price waiver of MiFID I, that is – the possibility for RMs and MTFs to use a passive pricing system. The purpose of the MiFID II waiver is to enable members or participants of an RM/MTF to obtain potential price improvements compared to the reference price, as well as limiting potential market abuse in the market from which the passive price is derived from (i.e. prevent manipulation of the reference prices in illiquid markets).1 Similar to the previous regime, under MiFID II the reference price waiver can be used where the price of the equity instrument is derived from (a) the RM or MTF where that instrument was first admitted to trading; or (b) the most relevant market in terms of liquidity,2 where that reference price is widely published and is regarded by market participants as a reliable reference price.3 There are also differences compared to MiFID I:

1.

The most significant change is that MiFID II subjects the reference price waiver to the double volume cap. The caps are in place to preserve the price formation process. MiFID II intends to do so by limiting reference price waiver usage through the double volume cap (see paragraph 2.5 below).4 MiFID I covered no capping mechanism.

2.

Secondly, under MiFID II requirements are in place how to determine the reference price. MiFID II requires the reference price to be established by obtaining (i) the midpoint within the current bid and offer prices of the RM/MTF where the equity instrument was first admitted to trading or the most relevant market in terms of liquidity (primary market); or (ii) when the price under (i) is not available, the opening or closing price of the relevant trading session.5 The rationale behind the MiFID II requirements on reference prices at the midpoint (instead of freely within the entire spread) is that midpoint reference prices give both the buyer and seller price improvements.6 MiFID I did not require the reference price to be based on the midpoint. Neither did MiFID I have rules for when the reference price was not available.7

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