EU Equity pre- and post-trade transparency regulation (LBF vol. 21) 2021/5.II.1.3.2:5.II.1.3.2 ESMA opinion on frequent batch auctions

EU Equity pre- and post-trade transparency regulation (LBF vol. 21) 2021/5.II.1.3.2

5.II.1.3.2 ESMA opinion on frequent batch auctions

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ESMA has provided an opinion with respect to frequent batch auctions. Frequent batch auctions for equity instruments are a new type of periodic auction trading system, which emerged in particular under MiFID II. Frequent batch auctions consist of auctions of a very short duration during the trading day triggered by market participants.1

Frequent batch auctions represent two main differences from ‘traditional’ periodic auctions. First, the duration of frequent batch auctions is very short, lasting only several milliseconds as opposed to traditional periodic auctions that last several minutes. Secondly, frequent batch auctions are not scheduled by the RM or MTF, as opposed to conventional periodic auctions. Instead, frequent batch auctions are triggered by a ‘call period’ every time (1) a pair of opposing orders can be matched or (2) triggered as soon as one order has been submitted.2 For the first system (i.e. a pair of opposing orders can be matched), the indicative price and indicative volume present in the periodic auction, that is – the pre-trade data, is only made available once a match has been found by the algorithm operating the auction. This means that no pre-trade data is made public in case only one order has been submitted.3 The second system (i.e. triggered as soon as one order has been submitted) displays an indicative price once the order has been submitted, that is – it does publish pre-trade information (indicative price).4

ESMA has indicated that the first type of frequent batch auctions (i.e. a pair of opposing orders can be matched) does not publish any pre-trade data pending a potential match. ESMA indicates this results in a situation where investors are not sufficiently informed of the true level of potential trading opportunities.5 ESMA therefore considers that:

‘trading venues operating (frequent batch auction) systems initiating auction calls on the basis of the first incoming order pending a potential match should inform market participants than an auction has started, thereby making market participants aware that there might be a trading opportunity and enabling them to participate in the auction (…). As soon as a potential match has been identified, the (MiFID II equity) pre-trade transparency requirements (…) should apply, i.e. the trading venue should make public the indicative price and volume.’6

In other words, ESMA does not require this type of frequent batch auctions to make public pre-trade information until a potential match is made. ESMA requires instead informing market participants about the fact that the frequent batch auction has started. In view of ESMA, the publication of pre-trade information under the MiFID II equity pre-trade transparency obligations for periodic auctions is only necessary where a potential match has been identified.7 ESMA has issued a new – and stricter view – on frequent batch auctions in the MiFID II Review. For an examination, see section VII below.

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