7.II.5.1 Different market structures

The first element was the difference in market structures across the Member States. Broadly speaking, a distinction could be made between the Southern versus Northern Member States.1 The markets of the Southern Member States were characterised by: (a) highly concentrated trading (often mandated by concentration requirements); (b) order-driven markets; and (c) a great degree of public intervention as to the operation of the market (among other things, the degree of transparency published).2 By contrast, the markets of the Northern Member States: (i) did not require the concentration of trading; (ii) were mainly quote-driven; and (iii) liberal as to the operation of the market (among other things, the degree of transparency could, within certain boundaries, be determined by the market itself).3 When it came to post-trade transparency, the level of transparency tended to be considerably higher on the order-driven markets (Southern Member States) compared to the quote-driven markets (Northern Member States).4 The level of pre-trade transparency varied widely across the order-driven (Southern Member States) and quote-driven (Northern Member States) markets.5

The different market structures upheld by the Southern versus Northern Member States resulted in complex negotiations on the ISD.6 In its ISD proposal, the Commission left room for separate national legal systems, but proposed some harmonization of minimum standards across the EU. The aim of the minimum harmonised standards was to limit the scope for competition among national rules.7 Minimum harmonisation was a tool to achieve political agreement.8 The Commission proposed no harmonised ISD transparency rules. The Commission only focused on access requirements for ‘stock exchanges’ (without providing a definition).9 The Southern Member States disagreed with the Commission’s proposal, which they regarded to be too limited. Reflecting their interventionist market philosophy, the Southern Member States proposed the ISD to encompass the concentration of trading on so-called ‘RMs’ (i.e. RMs). The Southern Member States proposed to introduce RMs as a new regulatory classification under the ISD. The Southern Member States suggested that RMs would be subject to minimum standards of post-trade transparency (not: pre-trade transparency).10 The Southern Member States argued that concentrated trading, combined with post-trade transparency, would contribute to liquidity and transparency of the RM (i.e. liquidity would be concentrated on post-trade transparent RMs).11 The Northern Member States disagreed with this view. The Northern Member wanted investment firms to have choice as where to execute an order (i.e. competition in terms of order execution venues). The Northern Member States also emphasized that the proposed transparency provisions, in focusing entirely on post-trade transparency, ignored the importance of pre-trade transparency.12

Although the commitment of both the Southern and Northern Member States to fair and efficient markets was not in question, it should be noted that both positions were also driven by national concerns.13 The Southern Member States saw (a) concentration and (b) post-trade transparency rules as an effective way to regain trading that flowed to the decentralised quote-driven markets over the previous years (in particular to the UK markets).14 At the same time, the Northern Member States wanted to protect their current position by permitting investor choice (no concentration of trading) and by focusing on pre-trade transparency rules. Post-trade transparency would be relatively harmful for the quote-driven markets, since here the liquidity provider would have to display its intertemporal position.15 As mentioned in chapter 6, where post-trade data is immediately published in a quote-driven market, the future trading position of the market maker is at risk (i.e. immediate post-trade data the market maker would potentially ‘show his cards’/display pre-trade information about future trades).16 The situation is different in a continuous order-driven market. Investors in a continuous order-driven market do not by definition (although possible) take intertemporal risk positions.

Despite their different views, the Southern and Northern Member States were able to adopt a compromise in the end. Both positions of the Southern and Northern Member States were reflected in the final ISD-text. The requirement to concentrate trading on an RM was possible, but optional and covered exceptions.17 The ISD introduced minimum harmonised transparency rules, with a strong emphasis on post-trade transparency. Pre-trade transparency rules were apparent, but only marginally. Furthermore, the ISD provided broad obligations and exceptions, which gave the Member States and, where permitted by national law, RMs substantial flexibility in interpreting the ISD post-trade transparency provisions. The compromise position of the ISD enabled the post-trade transparency obligations and exceptions for RMs to differ across the EEA.18 The different market structures and related different market philosophies resulted in the final ISD regime. The ISD regime was bottom-up with respect to common EEA post-trade transparency rules.