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EU Equity pre- and post-trade transparency regulation (LBF vol. 21) 2021/2.II
2.II Definition of equity pre-trade transparency
mr. J.E.C. Gulyás, datum 01-02-2021
- Datum
01-02-2021
- Auteur
mr. J.E.C. Gulyás
- JCDI
JCDI:ADS267245:1
- Vakgebied(en)
Financieel recht / Bank- en effectenrecht
Financieel recht / Europees financieel recht
Financiële dienstverlening / Financieel toezicht
Voetnoten
Voetnoten
Commission, Glossary of useful terms linked to the market for financial instruments, 2011, p. 12. The ISD, MiFID I, and MiFID II cover no explicit definition of what ‘orders’ and ‘quotes’ are. As used in this research, an order is an instruction to buy (buy order) or sell (sell order) a financial instrument. Orders can be placed in various trading systems, including so-called continuous auction order book trading systems and periodic auctions. Orders are commonly associated with the ‘buy side’, being individuals, institutional investors, and governments. The buy side can trade with each other (e.g. the buy and sell order of two individual investors match), but also with the ‘sell side’. The sell side concerns parties that provide (‘sell’) exchange services to the buy side (and other sell side parties), including the provision of liquidity. The sell side provides liquidity in the form of quotes. Quotes are accordingly the ‘orders’ of the sell side. Quotes can be provided in various trading systems, including quote-driven trading systems and request for quote trading systems. For an examination of the terms ‘buy side’ and ‘sell side’, reference is made to L. Harris, Trading & Exchanges: Market Microstructure for Practitioners, Oxford University Press, 2003, p. 32-33. For an examination of the various trading systems – including the applicable EU equity pre-trade rules -, reference is made to chapters 3-5.
For an examination of the MiFID I equity pre-trade transparency regime, reference is made to chapter 4 below.
In fact, MiFID II applies pre-trade transparency rules to certain (1) shares, depositary receipts, ETFs, certificates, and other similar financial instruments (equity) and (2) bonds, structured finance products, emission allowances, and derivatives (non-equity). For an examination of the term ‘equity’ (from the ISD to MiFID II), reference is made to chapter 1, section IV.
Commission, Glossary of useful terms linked to the market for financial instruments, 2011, p. 9.
For a fairly similar interpretation, see N. Moloney who notes that ‘(t)ransparency regulation governs the mandatory disclosure of the price, volume, and transactions information produced by trading venues and, under certain conditions, from bilateral trades between trading counterparties, and the availability of such disclosures to the market on a real-time basis’ (N. Moloney, EU Financial Governance and Transparency Regulation’, in D. Busch and G. Ferrarini (Eds.), Regulation of the EU Financial Markets: MiFID II and MiFIR, Oxford University Press, 2017, p. 322).
There is no explicit definition of (equity) pre-trade transparency under the ISD, MiFID I, or MiFID II. The Commission gave an interpretation of pre-trade transparency during the MiFID I era:
‘Pre-trade transparency refers to the obligation to publish (in real-time) current orders and quotes (i.e. prices and amounts for selling and buying interest) relating to shares (…).’1
In other words, the Commission views pre-trade transparency to be a three-dimensional concept, namely: (1) an obligation (2) to publish (3) pre-trade information (i.e. data on current trading opportunities). The Commission indicates that pre-trade transparency refers to shares (equity) (MiFID I situation),2 but it is reasonable to assume that the Commission’s interpretation of pre-trade transparency is also applicable to other financial instruments, such as depositary receipts, ETFs, certificates (equity-like), bonds, emission allowances, derivatives (non-equity), and so forth.3 The Commission also notes that a so-called ‘lit market’ is similar to a pre-trade transparent market. The terms ‘pre-trade transparency’ and ‘lit’ are in effect synonyms.4
For the purposes of this book, I believe it is more clarifying to use a two-dimensional, rather than a three-dimensional, definition of pre-trade transparency. I consider pre-trade transparency to be a two-dimensional concept, being: (a) pre-trade information (i.e. current orders and quotes) that is (b) published. I would suggest that the regulation of pre-trade transparency entails at least an obligation to publish pre-trade information (i.e. mandatory publication of pre-trade data), for example, as required under MiFID I or MiFID II.5 Pre-trade transparency as a two-dimensional concept permits to distinguish between (i) regulatory-driven (top-down) and (ii) market-driven (bottom-up) solutions for the publication of pre-trade information. Such a distinction is harder to make if one would follow the Commission’s three-dimensional definition (obligation, publication, and pre-trade information).