Einde inhoudsopgave
EU Equity pre- and post-trade transparency regulation (LBF vol. 21) 2021/5.II.2.4.1
5.II.2.4.1 General
mr. J.E.C. Gulyás, datum 01-02-2021
- Datum
01-02-2021
- Auteur
mr. J.E.C. Gulyás
- JCDI
JCDI:ADS266468:1
- Vakgebied(en)
Financieel recht / Bank- en effectenrecht
Financieel recht / Europees financieel recht
Financiële dienstverlening / Financieel toezicht
Voetnoten
Voetnoten
ESMA, Discussion Paper: MiFID II/MiFIR, 22 May 2014(ESMA/2014/548), p. 51.
Where the large order of the pension fund would be pre-trade transparent, other market participants could reset or adapt their orders (e.g. moving up or down the price limit, changing the size of the order, removing their orders, and so forth), thereby increasing the costs of trading for the pension fund. See, for example, ESMA, Discussion Paper: MiFID II/MiFIR, 22 May 2014(ESMA/2014/548), p. 52. For the advantages, as well as disadvantages of exceptions to pre-trade transparency for large orders, see also CEPS, MiFID 2.0: Casting New Light on Europe’s Capital Markets, 2011, p. 63.
L. Harris, Trading & Exchanges: Market Microstructure for Practitioners, Oxford University Press, 2003, p. 410-416 and p. 555. See, for example, S. Patterson and A. Osipovich, ‘High-Frequency Traders Feast on Volatile Market’, Wall Street Journal, 27 March 2020 (available at: https://www.wsj.com/articles/high-frequency-traders-feast-on-volatile-market-11585310401).
L. Harris, Trading & Exchanges: Market Microstructure for Practitioners, Oxford University Press, 2003, p. 410-416 and p. 555.
ESMA, Discussion Paper: MiFID II and MiFIR, 22 December 2014, p. 72. For the sake of completeness, enabling large orders to remain dark can also enhance volatility. The reason here is that the pre-trade transparent part of the market contains less depth (i.e. the large order is not part of the pre-trade transparent market), which can increase price swings. As a consequence, the aim is to find a balance between the advantages and disadvantages of (a) whether or not to publish the large order and, if so, (b) in which size orders can remain dark (ibid).
ESMA, Opinion on the assessment of pre-trade transparency waivers for equity and non-equity instruments, 16 December 2020(ESMA70-155-6641), p. 5.
For an examination of the MiFID I equity pre-trade transparency regime, reference is made to chapter 4.
MiFID II provides a waiver for orders that are large in scale compared with the normal market size, that is – the large in scale waiver.1 MiFID I had a similar waiver in place. The rationale behind the large in scale-waiver has not changed. The large in scale-waiver is designed to protect large orders (informally referred to as ‘block trades’) from adverse market impact and abrupt price movements.2 Consider the example where a large order of a pension fund would create an intense reaction to the market price where the order would be made pre-trade transparent.3 Pre-trade transparency publication of the large order could result in higher costs for the pension fund (market impact) compared to when the order would remain dark.4 While volatility is not by definition negative (i.e. it creates trading opportunities),5 it can harm liquidity due to the increase of risks.6 Similar to MiFID I, MiFID II aimed to reduce the risks of large orders being made pre-trade transparent through the large in scale-waiver.7
While the rationale has from MiFID I to MiFID II not changed, MiFID II is different in the sense that the MiFID II large in scale waiver is overall more flexible. ‘Overall’, because ESMA makes clear that orders should not be aggregated by the trading venue applying for the large in scale-waiver. ESMA states that to benefit from the large in scale waiver, the size of the single order should be equal to or above the large in scale-threshold.8 Similar ESMA (or CESR) guidance was not in place under MiFID I.9 The ESMA guidance aims to prevent the situation where large in scale-orders are aggregated in order to circumvent the MiFID II double volume cap, the latter not being applicable to the large in scale-waiver.10
Besides the ESMA guidance, the MiFID II large in scale waiver is more flexible compared to MiFID I. First of all, under MiFID II the large in scale-thresholds for shares have been lowered (other equity instruments fell outside the scope of MiFID I and can therefore not be compared). In effect, potential share trades under MiFID II will sooner be subject to the waiver than was the case under MiFID I.11 Secondly, MiFID II makes explicit that residual orders (stubs) remain under the scope of the large in scale-waiver. MiFID II states that, unless the price or other relevant conditions for the execution of an order are amended, the waiver shall continue to apply for orders that fall below the threshold after partial execution.12 The situation for stubs was unclear under MiFID I. MiFID II clarifies this by permitting stubs (partially executed trades) to remain dark.13 The MiFID II large in scale-waiver is more flexible in order to (i) respond to the reduced average order size from MiFID I to MiFID II, (ii) support liquidity in less liquid markets, and (iii) to balance between implementation costs versus benefits in enhancing pre-trade transparency (i.e. making stubs transparent can be complex). These three elements are examined in further detail below (paragraph 2.4.3). But first an examination is provided of what MiFID II defines as a ‘large in scale order’.