18.IV.3.4 Interim conclusion

From the ISD to MiFID II a trend is apparent in which the EU relies increasingly on a top-down approach to manage prices for equity pre- and post-trade data. The main EU guidance under the ISD came from CESR in the form of formally non-binding guidance for alternative trading systems. MiFID I covered a hybrid strategy with (1) a broad MiFID I text on a ‘reasonable commercial basis’ and (2) CESR guidance on the unbundling of pre- and post-trade data from other services/data. With MiFID II several new top-down elements have been introduced. The MiFID II regime can be divided in three segments, namely (i) the MiFID II concept of a ‘reasonable commercial basis’, (ii) unbundled pre- and post-trade data, and (iii) free of charge data 15 minutes after publication. The consequence of the rise in top-down elements in the EU strategy for data access is (a) more focus on protecting data users, whilst (b) leaving less freedom for data suppliers.

The trend towards more top-down data access regulation – including the related focus on data users – stems from the increase in fragmentation and technological innovation. The competitive trading landscape ever since MiFID I has provided benefits, such as investor choice and innovation. However, the competitive landscape has also made it more costly to obtain a consolidated view of trading due to fragmented pre-trade, and in particular post-trade, data. Combined with technological developments, which require more pre- and post-trade data (e.g. so-called ‘non-display data’ used for algorithmic trading), the demand for data has grown. In recognising the growth in demand for data, the EU has responded by increasingly introducing top-down data access elements from the ISD to MiFID II. The EU has traditionally intended to find a balance between (a) incentives for data suppliers in providing high quality data (i.e. data revenues could be made) and (b) ensuring data users have sufficient access to the data. From the ISD to MiFID II a shift is apparent towards growing EU focus on the data user.

There is no clear-cut answer whether the shift towards data user protection – including the increase in top-down elements for data access – has been successful. Data prices and terms and conditions for data usage are highly controversial. The same is true for the degree of regulatory intervention in establishing the ‘right’ balance between data users and data suppliers in the EU strategy. Nonetheless, taking the final view of the EU as a measure, one can draw the following conclusions. To start, the concentrated trading landscape under the ISD raised relatively little concerns in terms of data access. The reason for this was that a consolidated view of equity trading was often available through obtaining equity pre- and post-trade data from one or a few RMs on which trading was concentrated. Where fragmentation was apparent, RMs and/or data vendors provided a consolidated view of trading. That being said, a costly precondition of the ISD was limited competition among data suppliers. The limited competition raised the risk of potential market failures in the form of data monopolies or oligopolies.

The EU did not take these risks for granted under MiFID I. MiFID I not only resulted in competition in the area of trading services, but also for the data generated from those trades. The hybrid EU strategy under MiFID I, comprised of (1) a broad MiFID I provision on a reasonable commercial basis and (2) CESR guidance on unbundling, were in hindsight too limited. Whilst in particular RMs and MTFs still had sufficient incentives to provide high quality pre- and post-trade data, a main problem was the lack of a consolidated view of trading, in particular for post-trade data. A ‘snapshot’ of the market was available, but only at a high cost. A main reason here was the fragmentation of trading, which required more data to be collected (i.e. bought) from multiple venues. Taking the final view of the EU, the MiFID I provisions were in the end too broad, a matter that also soft-law of CESR did not solve. Although controversial, the final EU view was that data costs under MiFID I were too high.

The EU intends to change the MiFID I situation by using a more top-down approach under MiFID II. Despite the efforts of the EU, experience with MiFID II suggests that the data pricing provisions require a careful review. ESMA observes that so far MiFID II has not delivered on its objective to reduce the price of market data. Simply put, the argument is that data suppliers still have too much power under the current MiFID II regime. MiFID II, among other things, leaves flexibility in the interpretation of certain rules, such as a ‘reasonable margin’. MiFID II also does not harmonise several aspects of the MiFID II data provisions (e.g. terms and conditions in data agreements). ESMA – as well as several other data users – show willingness to introduce new top-down elements for EU equity pre- and post-trade data pricing regulation to alter the current MiFID II regime. If accepted, the EU strategy would focus (even) more on the protection of data users, whilst reducing freedom for data suppliers.

While the outcome of the MiFID II Review is uncertain, it is useful to make some remarks about the future of EU regulation concerning equity pre- and post-trade data prices. Leaving aside economic consequences, such as an impact on the freedom of data sellers, a legal consequence is overlap with other areas of EU regulation, namely competition law and intellectual property law. An increase of EU regulation over data prices suggests a rethink of EU equity pre- and post-trade transparency regulation. It seems desirable that the increase of EU equity pre- and post-trade transparency regulation in the area of data prices involves at least an assessment of whether competition authorities, rather than financial NCAs, are a better alternative to ensure data prices are ‘reasonable’. The current wait-and-see approach of the EU on ownership of equity pre- and post-trade data prices seems appropriate in this context. It is questionable whether intellectual property rights should be held within the domain of EU equity pre- and post-trade transparency regulation.