Einde inhoudsopgave
EU Equity pre- and post-trade transparency regulation (LBF vol. 21) 2021/4.III.3.1
4.III.3.1 General
mr. J.E.C. Gulyás, datum 01-02-2021
- Datum
01-02-2021
- Auteur
mr. J.E.C. Gulyás
- JCDI
JCDI:ADS267005:1
- Vakgebied(en)
Financieel recht / Bank- en effectenrecht
Financieel recht / Europees financieel recht
Financiële dienstverlening / Financieel toezicht
Voetnoten
Voetnoten
In brief, MiFID I referred to a ‘professional client’ as a client that was (i) an entity required to be authorised or regulated to operate in the financial markets, such as credit institutions, investment firms, or insurance companies; (ii) large undertakings that met certain size requirements; (iii) national and regional governments; or (iv) institutional investors whose main activity was to invest in financial instruments (art. 4(1)(11) MiFID I). A ‘retail client’ referred to a client that was not a professional client (art. 4(1)(12) MiFID I).
More generally, where market participants negotiate prices, orders may sometimes trade at better prices than the initial price. Such orders receive price improvement. Price improvement often happen when the spread (difference bid and ask price) is wide and the incoming order is small (L. Harris, Trading & Exchanges: Market Microstructure for Practitioners, Oxford University Press, 2003, p. 71).
MiFID I in principle required SIs to execute the orders they received from their clients (both retail and professional)1 at the time of reception of the order for the firm quotes the SI published.2 SIs were, in other words, required to take a mandatory risk position (‘make a market’) in relation to the shares for which the SI published firm quotes. ‘In principle’, because MiFID I covered an exception in respect of professional clients. The MiFID I exception was as follows:
An SI was permitted to offer professional clients a so-called ‘price improvement’. A price improvement takes places where a SI buys a share at a higher price (or sell a share at a lower price) than the quote the SI published at the time of the order reception.3 Under MiFID I a price improvement was permitted provided that (i) this price fell within a public range close to market conditions; and (ii) the orders were of a size bigger than customarily undertaken by retail investors.4 Under MiFID II the size bigger than customarily undertaken by retail investors was set at EUR 7.500.5
The conditions of (i-ii) did not apply for price improvements made by SIs in relation to transactions where execution in several shares was part of one transaction. The same was true in relation to orders that were subject to conditions other than the current market price.6
The rationale behind the price improvement possibilities was to protect SIs. In order to protect their trading positions, SIs could widen their spread (difference between bid and offer) and so offer price improvements to clients on the published quote.7 The link between price improvements and the market conditions was to ensure that the price improvement remained related to the current market prices (point 1). Such a link was not necessary where the price improvements related to orders not subject to the current market price (point 2).
MiFID I also covered a quote execution rule for the situation where a SI quoted only one quote or whose highest quote was lower than the standard market size. Here, where a SI received an order from a client of a size bigger than its quotation size, but lower than the standard market size, MiFID I noted that the SI could decide to execute that part of the order that exceeded its quotation size, provided that it was executed at the quoted price. An exception to the foregoing was in place where price improvements as stipulated by MiFID I were permitted.8 Where the SI quoted in different sizes and received an order between those sizes, which it chose to execute, the SI needed to execute the order at one of the quoted prices. Also here an exception was in place where MiFID I permitted price improvements.9