17.VII Conclusion about the development from the ISD to MiFID II

This part of the research (Part IV) – similar to the other research parts (Parts I-III) – shows an increase in EU equity pre- and post-trade transparency regulation from the ISD to MiFID II. As with the other research parts (Parts I-III), the increase is the result of the EU objective of establishing an integrated European capital market. Technological innovation and increased fragmentation resulted in increased demand for equity pre- and post-trade data. The result is compensation in the form of more EU equity pre- and post-trade transparency regulation, here in the form of equity pre- and post-trade data prices.

The connection between technological innovation/fragmentation and more EU equity pre- and post-trade transparency regulation is apparent from the ISD to MiFID II. Under the ISD equity pre- and post-trade data prices were mainly a matter of national law. ‘Mainly’, because CESR published guidance on data prices through broad standards on a ‘reasonable commercial basis’ for alternative trading systems. National law could in effect largely decide on the prices of equity pre- and post-trade data. In practice, RMs had a dominant position in the market for equity pre- and post-trade data (in particular due to the optional ISD concentration-rule). RMs often charged data prices on the basis of (1) a head count per-device for each end-user, (2) use restrictions (e.g. redistribution) and (3) the type of data (e.g. depth and latency). Data vendors – in addition to RMs – applied their own fees. There were concerns about the market power of RMs, but the issues were relatively mild due to the concentrated market setting. This is because it was often not necessary to buy (license) equity pre- and post-trade data from a wide range of venues (e.g. RMs) in order to obtain a consolidated view of trading.

The situation changed under MiFID I. MiFID I not only eliminated concentration of trading, but also the market concentration related to the data generated from those trades.1In other words, MiFID I introduced competition in the area of trading and in the area for data publication services. To ensure that equity pre- and post-trade data would still be accessible in the potentially fragmented market, MiFID I introduced some top-down elements for equity pre- and post-trade data prices. MiFID I covered a broad principle requiring MiFID I equity pre- and post-trade data to be made available on a ‘reasonable commercial basis’. MiFID I provided no specifications on the requirement. CESR supplemented the MiFID I-rule by formally non-binding guidance. Most notably, CESR recommended RMs, MTFs, and investment firms (including SIs) to unbundle equity data from other services and/or data. On the whole, the amount of top-down regulation for equity pre- and post-trade data prices was limited. The MiFID I framework reflected the EU preference to rely mainly on a bottom-up approach. Competition among data suppliers was an important premise of the MiFID I framework to ensure ‘reasonable’ data prices.

MiFID II changes the MiFID I regime. MiFID II aims to lower equity pre- and post-trade data prices compared to MiFID I, which is an element of the broader MiFID II objective to enhance transparency. MiFID II has introduced three sets of data pricing-rules to achieve this aim, that is – (1) separate pre- and post-trade data; (2) the specification of a reasonable commercial basis; and (3) free of charge data 15 minutes after publication. By introducing the three rule-sets, MiFID II can be characterized as more top-down compared to MiFID I. Nonetheless, the MiFID II data pricing provisions are light-touch in nature. MiFID II (a) leaves data vendors outside the scope, (b) covers principle-based provisions (leaving flexibility for MiFID II Data Suppliers), and (c) relies on competition among MiFID II Data Suppliers and data vendors to ensure ‘reasonable’ prices. The MiFID II rules are supplemented by formally non-binding ESMA guidance. The limited scope, flexibility through principle-based provisions, reliance on market forces, and the formally non-binding status of the ESMA guidance, makes the MiFID II framework for equity pre- and post-trade data prices light touch in nature.2

The MiFID II regime for equity pre- and post-trade data prices is part of the MiFID II Review of ESMA and the Commission. ESMA acknowledges that trading venues and data users/data users have different opinions, but ESMA agrees that MiFID II has not delivered on its objective to reduce the price of equity pre- and post-trade data compared to MiFID I. Due to the conflicting views, the ESMA proposals are top-down, albeit in a limited fashion. The ESMA proposals concern a mix of legislative changes and supervisory guidance. The ESMA proposals include: (i) rule-based provisions (e.g. common market data terminology), (ii) a consideration of expanding the MiFID II scope (include data vendors currently falling outside MiFID II), (iii) stricter enforcement by NCAs, and (iv) removal of price discrimination. ESMA does not recommend price controls (e.g. ESMA/NCA approval) and/or price regulation (e.g. a revenue cap), but it does feature less intrusive top-down elements. On the whole, ESMA’s proposals intend to balance between competition in the area for data services versus the need for regulatory intervention. The Commission is currently verifying the ESMA observations and whether or not stakeholders agree with the ESMA proposals. Whatever the outcome of the Commission’s consultation will be, ESMA – as well as several other data users – show willingness to introduce new top-down elements for EU regulation with respect to prices for equity pre- and post-trade data.

It is useful to think about the future consequences of increased EU equity pre- and post-trade transparency regulation concerning data prices. Leaving aside economic consequences, such as an impact on the freedom of data suppliers, a legal consequence is overlap with other areas of EU regulation, namely competition law and intellectual property law. The increase in EU equity pre- and post-trade transparency regulation over data prices suggests a rethink of EU equity pre- and post-trade transparency regulation. It seems desirable that the increase of EU equity pre- and post-trade transparency regulation in the area of data prices involves at least an assessment of whether competition authorities, rather than financial NCAs, are a better alternative to ensure data prices are ‘reasonable’.3 The current wait-and-see approach of the EU on ownership of equity pre- and post-trade data prices seems appropriate in this context. It is questionable whether intellectual property rights should be held within the domain of EU equity pre- and post-trade transparency regulation.