5.VIII Conclusion about MiFID II

MiFID II maintains a competitive approach. Similar to the previous regime (MiFID I), trading platforms are permitted to engage in competition in terms of order execution. Nonetheless, MiFID II has introduced several top-down elements that make MiFID II stricter than MiFID I. The MiFID II equity pre-trade transparency regime applies to a wider range of instruments, the rules are mainly laid down in detailed maximum harmonised regulations (MiFIR and implementing regulations), more pre-trade tranparency needs to be displayed, and a share trading obligation is in place. Furthermore, MiFID II covers a highly operational regime in ensuring calculations and databases are available for the adequate functioning of the MiFID II equity pre-trade transparency regime. The top-down elements of MiFID II intend to reduce the amount of dark trading under MiFID I. In doing so, the MiFID II equity pre-trade transparency regime is not about providing full pre-trade transparency, but the right amount of transparency that contributes to efficient price formation and a level playing field between different types of trading platforms, while avoiding adverse market impact.1

So far, the results of the MiFID II equity pre-trade transparency regime are mixed. On the one hand, MiFID II resulted in much more equity pre-trade transparency compared to MiFID I, in particular due to the expansion in scope of financial instruments. MiFID II also resulted in a shift towards equity pre-trade transparent platforms, most notably SIs. SIs have replaced the broker crossing networks and other off-exchange trades of MiFID I, thereby creating a more equity pre-trade transparent trading environment.2 The double volume cap mechanism has resulted in the suspension of dark trading of more than 1600 equity instruments. These developments suggest that dark trading has been reduced compared to MiFID I, which means that MiFID II is delivering on its ambitions, at least in part.3

There are also concerns. ESMA observes that since 2018 (1) there has not been a significant change in the share of trading volume executed on RMs, MTFs, and investment firms operating outside such venues (including SIs), (2) a large share of volume executed on RMs and MTFs is not subject to equity pre-trade transparency, and (3) the use of RM and MTF equity pre-trade transparency waivers has changed due to the application of the double volume cap.4 The ESMA observations stem from before COVID-19, but whatever the final effects, MiFID II is clear in its ambitions. MiFID II intends to enhance equity pre-trade transparency compared to MiFID I. ESMA believes that MiFID II has not succeeded in this ambition. ESMA seems willing to tighten the MiFID II equity pre-trade transparency regime even further to achieve this aim. ESMA intends to do so by: (a) restricting the RM and MTF equity pre-trade transparency waiver regime, (b) simplifying the highly operational double volume cap mechanism (if maintained), (c) introducing a stricter regime for equity SIs, and (d) clarifying the scope of the MiFID II share trading-obligation, in particular in relation to third-country shares.

A related, and broader, challenge for the EU is Brexit. A so-called Hard Brexit, that is - where the UK leaves without a withdrawal agreement - would result in complexities for the MiFID II equity pre-trade transparency regime. Data from the UK would no longer be collected and the MiFID II pre-trade transparency rules, in particular the double volume cap mechanism, would potentially require new calibrations of the thresholds. Overlap between the MiFID II share trading-obligation and a potential UK share trading-obligation can disrupt the market.

If one zooms out even further, it becomes clear that the MiFID II equity pre-trade transparency ambitions are part of the broader EU aim to set up an integrated European financial market (Capital Markets Union (CMU)). MiFID II intends to achieve this aim by mitigating negative effects following competition across the EEA, such as liquidity fragmentation and reduced price formation. MiFID II has the objective to reduce (not: diminish) the amount of dark trading (pre-trade opaque trading) compared to MiFID I. MiFID II means to do so through top-down regulation. The current situation shows that MiFID II has only been able to achieve these aims in part. While several indications are good, the common EU view at the moment (in particular of ESMA) is that dark liquidity has largely shifted (not been reduced). The EU is aware of this situation. If one zooms in once again, one can observe that the EU introduced several additional rules and ESMA guidance has been introduced to support a further level playing field and increased equity pre-trade transparency. Main examples include (Commission and) ESMA guidance on Brexit, frequent batch auctions, the tick size regime for SIs, and the share trading-obligation, and data quality for the double volume cap. More recent initiatives are the ESMA and Commission consultation. Only time will tell whether these efforts will enable the MiFID II equity pre-trade transparency regime to succeed.