4.IV.2 Concluding remarks

The final piece of the MiFID pre-trade transparency regime for market participants was the client limit order display-rule. Provided certain conditions were met, the rule required investment firms operating outside RMs and MTFs to immediately publish unexecuted client limit orders in shares admitted to trading on an RM. The MiFID I rule was part of the broader MiFID I framework to mitigate any negative effects of competition, such as fragmentation and reduced price formation. Although not entirely clear due to political compromise, the MiFID I rule aimed to find a balance between free competition (investment firms could still internally execute orders) and the importance of making unexecuted limit orders immediately public for the sake of price formation and best execution.

The MiFID I approach in achieving this goal was overall top-down. MiFID I introduced harmonised rules requiring investment firms to immediately publish client limit orders where certain conditions were met. The approach was ‘overall’ top-down, since MiFID I still left flexibility when it came to the publication of client limit orders (pre-trade transparency). Several bottom-up elements reflected the political compromise on the MiFID I rule. To start, investment firms could still execute limit orders in-house (whether through internalisation or agency crossing), as long as this was done immediately. Secondly, several exceptions were in place. Client could decide not to disclose the limit orders and a waiver was available for large in scale limit orders. Third, and finally, a Member State option was apparent. Member States could, but were not required to, decide that investment firms needed to comply with the rule by sending unexecuted client limit orders to an RM or MTF.

The bottom-up elements resulted in a MiFID I framework that did not require all unexecuted client limit orders to be (immediately) displayed to the market, or at least not in the same way (Member State option). Although not entirely clear due to political compromise, the reason for doing so seemed to be the aim to find a balance. The EU intended to balance the merits of competition versus competition risks, such as liquidity fragmentation and harmed price formation.