5.VII.1.2.5 Interim conclusion

The ESMA MiFID II Review reopens a ‘classic’ debate in EU equity pre-trade transparency regulation. The EU is once more trying to balance the merits of equity pre-trade transparency (e.g. price formation and achieve best execution) versus the advantages of dark trading (e.g. reduce market impact, enable to negotiate a better deal). ESMA takes a perspective that emphasizes more equity pre-trade transparency, in particular by proposing to restrict the reference price waiver to size and to tighten the large in scale-threshold for ETFs. At the same time, ESMA believes that the current waiver regime for RMs and MTFs has become too complex. In light of this observation, ESMA proposes to remove the four percent threshold of the double volume cap, whilst making the EU level threshold stricter to ensure sufficient equity pre-trade transparency (from eight to seven percent). ESMA adds that NCA notifications for the suspension under the double volume cap should no longer be necessary due to the monthly ESMA publications in this area. ESMA also proposes a harmonized regime for sanctions of infringements of the double volume cap at the EU level in order to ensure a level playing field. Last, but not least, and despite earlier hesitations, ESMA recommends to retain the possibility to combine waivers. The rationale here is to prevent market fragmentation (one waiver per trading system).

The ESMA position is somewhat of a middle-way between traditional perspectives in EU equity pre-trade transparency regulation. ESMA emphasizes exceptions to equity pre-trade transparency only for large orders (also for the reference price waiver) and efficient order handling (order management). The emphasis on large in scale-orders and efficient order handling as exceptions is a well-accepted view in one camp of EU equity pre-trade transparency regulation (market shaping-perspective). That being said, ESMA wants to accommodate the concerns raised by a stricter EU equity pre-trade transparency approach (market facilitating-perspective).1 The market facilitating-perspective has traditionally emphasized a broad range of execution possibilities, including with the reference price and negotiated trade waiver. The argument here is investor choice, innovation, price improvements (the reference price waiver) and better prices through negotiation (negotiated trade waiver). In view of the market shaping-perspective, a too strict equity pre-trade transparency approach can harm liquidity provision. ESMA intends to take these concerns into account. Main examples are the ESMA proposal of one threshold for the double volume cap, permitting combinations of waivers, and a compromise position on the large in scale-threshold for ETFs. The ESMA proposal reflects the view of compensating a stricter equity pre-trade transparency approach by proposing a simpler regime for the industry. In sum, a traditional debate in EU equity pre- and post-trade transparency regulation is taking place. A traditional debate in which ESMA is moving towards a more market-shaping (not: market-led) perspective.