4.II.2.1.2 Background

Already under the ISD a number of reference price systems enabled market participants to trade at a reference price.1 CESR noted that in some reference price systems investors were able to view the orders entered. In other words, the orders in these reference price system were pre-trade transparent. However, other reference price systems in the EU published no information about the orders entered into the reference price system.2 In the latter situation, no pre-trade transparency was available to those seeking to trade in the reference price system. The rationale for not publishing pre-trade information about the orders entered into the reference price system was to reduce the incentive to manipulate the price from which the reference price would be derived from.3

In CESR’s view, reference price systems needed to be eligible for a waiver from the MiFID I pre-trade transparency obligations. CESR believed that it was necessary to provide the reference price waiver in order to reduce the incentive to manipulate the continuous market before the reference price was fixed, especially in less liquid shares.4 CESR stated that too much pre-trade transparency, especially in illiquid markets/illiquid shares, could attract manipulative behavior.5 CESR also advised that the price being referenced needed to be widely recognized as a reliable reference price and widely published.6 The Commission accepted CESR’s advice. This was reflected in the final MiFID I-text. A MiFID I waiver was available for reference price systems, as long as the criteria advised by CESR were met (i.e. the reference price was widely available and accepted as a reliable reference price).7

As noted above, during the MiFID I timeframe the reference price waiver was also used to obtain potential price improvements (instead of preventing reference price manipulation). The business of systems using the reference price waiver evolved from satisfying demand for trading primarily in less liquid shares to trading in the most liquid part of the market.8 The background of this development is examined in the following chapter on the MiFID II equity pre-trade transparency regime (see chapter 5 below).