18.V Conclusion

The synthesis covers three sections. The first section of the synthesis shows what EU equity pre- and post-trade transparency regulation is. The synthesis makes clear that EU equity pre- and post-trade transparency regulation can be defined in a narrow or broad way. Both definitions have their pros and cons, but the broad definition suits best with the current EU situation. The current EU situation is characterised by a highly fragmented equity market and technological innovation, such as algorithmic trading. The result is a higher demand for equity pre- and post-trade data in order to obtain a consolidated overview of trading. A broad definition of EU equity pre- and post-trade transparency regulation suits best with this situation. This is because a broad definition includes all EU requirements for equity pre- and post-trade transparency, with the term ‘transparency’ being a genus that includes several species, such as mandatory disclosure, publication and consolidation arrangements, and the price of equity pre- and post-trade data. At the same time, a broad definition is not perfect. A main disadvantage is its unclarity. Although better suited for the current EU situation, a broad definition of EU equity pre- and post-trade transparency regulation makes it hard to assess where the definition ends.

The second section of the synthesis explained why EU equity pre- and post-trade transparency regulation has increased from the ISD to MiFID II. Three factors are identified, namely: (1) market philosophies, (2) market structures, and (3) technological innovation. There are two main market philosophies (factor 1), being (a) the market-led and (b) the market-shaping philosophy. Supporters of both philosophies support a high degree of equity pre- and post-trade transparency, but have different opinions about what a ‘high degree’ constitutes and how it should be achieved (EU regulation versus market forces/national law). The four main and related elements of a market structure (factor 2) are the market microstructure, the amount of concentration in a market (market macrostructure), the specifics of the financial instruments traded, and the preferences of market participants. The market structure results in a different view of the EU towards the necessity of EU equity pre- and post-trade transparency regulation. For example, ever since MiFID I the EU is trying to reduce the risks of a competitive market setting (fragmentation risks) by increasing the amount of EU equity pre- and post-trade transparency regulation. Third, and finally, technological innovation (factor 3) has resulted in more EU equity pre- and post-trade transparency regulation. For example, the rise of high frequency trading is related to an increase of dark trading under MiFID I, hence the EU believed it was necessary to introduce stricter equity pre-trade transparency rules in order to reduce dark trading. Another example is that technological innovation, in particular algorithmic trading (HFT included), resulted in an increased demand for equity pre- and post-trade data. The EU has responded by introducing more rules on equity pre- and post-trade data prices. Several other examples of links between technological innovation and increased EU equity pre- and post-trade transparency regulation have been examined in the synthesis and research as a whole.

Lastly, the third section of the synthesis looked at the consequences of increased EU equity pre- and post-trade transparency regulation. The consequences have been examined by looking at how successful the ISD, MiFID I, and MiFID II equity pre- and post-trade transparency regimes were, respectively are. Taking the final view of the EU as a measure, the synthesis shows that the increase of EU equity pre- and post-trade transparency regulation has been partially successful. Areas of success include, among other things, more equity pre- and post-trade transparency under MiFID II due to an increased scope (i.e. the MiFID I regime was limited to shares admitted to trading on an RM) and more data at the disposal of the EU to monitor market developments and to adjust the EU equity pre- and post-trade transparency rules if deemed necessary. That being said, there are many areas in which the increase in EU equity pre- and post-trade transparency regulation has not been successful. These areas can be divided in three categories, namely: (i) too limited EU intervention, (ii) an inadequate design of the rules, and (iii) a too complex regime. Examples of too limited intervention include the lack of a CTP under MiFID II and many (not: all) data users argue that, despite MiFID II rules, data prices are still too high. Many of the EU rules were and are inadequately designed, such as the SI-definition under MiFID I and a too vague MiFID II share trading-obligation. The EU regime for equity pre- and post-trade transparency has also become very complex. Examples are the operational nature of data collection, calculation and publication (e.g. the double volume cap and ESMA databases). The expansion of EU equity pre- and post-trade transparency regulation is also complex because it borders with other areas of EU law, most notably competition law and intellectual property law (equity pre- and post-trade data prices).

The results of the synthesis raise the question whether the benefits of increased EU equity pre- and post-trade transparency regulation outweigh the costs. This question can only be answered from a holistic perspective. Almost all shortcomings of EU equity pre- and post-trade transparency regulation are related to the EU equity market structure. Changes to the EU equity market structure would solve a lot of equity pre- and post-trade transparency issues. A solution to change the EU equity market structure can be to: (1) only allow equity trading to take place on one or a few RMs and MTFs (i.e. mandatory concentration), (2) ensure strict RM and MTF equity pre-trade and post-trade transparency rules, and (3) not allowing RMs and MTFs to be profit maximising. The result would be pooled liquidity (consolidated) and a high degree of equity pre- and post-trade transparency. Current shortcomings of MiFID II, in particular the lack of data quality outside RMs and MTFs and the related lack of a consolidated tape (and consolidated quote), as well as the perceived lack of a level playing field between RMs/MTFs and SIs, would be solved. In addition, a concentration setting would no longer require NCAs and ESMA to engage in complex data issues, such as collecting data from a wide range of venues in order to ensure the ESMA databases function in practice. In a concentrated market setting, the demand for equity pre- and post-trade data would probably drop, because data users would no longer be required to purchase equity pre- and post-trade data from multiple venues in order to obtain a trading overview. Because the interests of RMs and MTFs are not necessarily aligned with the interests of data users, the ability of RMs and MTFs to make maximised profits would have to be reduced. The aim here is to diminish the market power of RMs and MTFs to enable data users to obtain equity pre- and post-trade data at a ‘reasonable’ price.

While useful to solve many EU equity pre- and post-trade transparency problems, this solution has many pitfalls. It reminds somewhat of the ISD situation in which competition in the area of trading and data services was limited and there was only scarce investor choice and innovation. In fact, main innovations of the EU equity market (i.e. shift from open outcry to electronic trading) resulted from the UK situation in which trading platforms could compete before and under the ISD. The UK equity market under the ISD was also characterised by much more investor choice (e.g. internalisation) compared to the more concentrated market setting of France and Italy. In other words, a concentrated market setting has benefits, but it can also reduce the evolutionary spirit of the EU equity markets. Besides, limiting RMs and MTFs in being profit maximising can also harm innovation and investments in ensuring the published equity pre- and post-trade data is of high quality. A concentrated market setting also does not solve all questions related to EU equity pre- and post-trade transparency regulation. An example is how to deal with third countries in the current globalised trading setting. ESMA intends to ensure MiFID II has no extraterritorial effects, but it is highly contentious what an ‘EU situation’ is (e.g. how to deal with ‘dual-listed’ shares). A concentrated market setting in effect does not solve all problems of EU equity pre- and post-trade transparency regulation.

It should not be forgotten that MiFID I was a way forward for the EU equity market. This is because MiFID I opened up competition and gave freedom to market participants, including RMs, MTFs, and investment firms operating on and outside such venues. It is true that the competitive setting of MiFID I and MiFID II resulted in a fragmented market setting and high demand for equity pre- and post-trade data. This implies that a competitive market setting should be compensated by means of EU equity pre- and post-trade transparency regulation and, looking at the current shortcomings of MiFID II, potentially even more in the future. These observations suggest that the best way forward is somewhere in the middle. It could mean that more concentration of equity trading is necessary, but not to the same extent as under the ISD. In the end this is an economic assessment and ultimately a political one. The main observation from a legal point of view is that EU equity pre- and post-trade transparency regulation is a means to achieve an end, namely an integrated European capital market. This means that, while many problems of EU equity pre- and post-trade transparency regulation can be solved by means of a concentrated market setting and inability of RMs and MTFs to maximise profits, a holistic point of view is necessary to provide the final answer. This synthesis intends to contribute to obtaining a holistic point of view. The synthesis intends to do so by providing the what, why, and consequences of one element of the EU equity market puzzle, namely EU equity pre- and post-trade transparency regulation.