4.III SIs

The foregoing paragraph examined the MiFID I equity pre-trade transparency regime for RMs and MTFs. Instead of transmitting a client order to an RM or MTF, MiFID I also permitted investment firms to execute orders internally (in house). One way of doing this was through internalisation of client orders. Internalisation of client orders occurs where an investment firm acts on one side of the transaction for the account of the client and on the other side on its own account.1 Under MiFID I internalisation was not a separate investment service or investment activity. Instead, it was a combination of an investment service (acting on behalf of the client) and an investment activity (trading on own account). MiFID I encompassed a distinct classification for investment firms that engaged in so-called ‘systematic internalisation’ (SI) (under the ISDno SI classification was in place).2

MiFID I subjected SIs to a distinct equity pre-trade transparency regime. The aim of the MiFID I pre-trade transparency regime for SIs was to ensure that investors were adequately informed as to the true level of potential share transactions (pre-trade), also where those transactions took place outside RMs and MTFs.3 The pre-trade transparency requirements for SIs were also in place for related aims, including the support of price formation, the ability for investment firms to achieve best execution,4 as well as facilitating the level playing field between RMs, MTFs, and SIs.5

The MiFID I equity pre-trade transparency rules for SIs were lighter than the pre-trade transparency regime for RMs and MTFs. The reason for this was that SIs traded for their own account (in executing client orders), which meant that SIs faced position risks.6 Although not entirely clear due to political compromise, the MiFID I regime aimed to find a middleground between the merits of equity pre-trade transparency and the position risks of SIs.7