5.II.2.5.2.1 Level 1 and Level 2 text: controversial nature of the negotiated trade and reference price waiver

The double volume cap mechanism is best understood against the history of the negotiated trade and the reference price waiver. As examined in chapter 4, the negotiated trade waiver was already controversial in drafting MiFID I. Some NCAs believed the negotiated trade waiver would benefit investors, such as by enabling best exection through the ability to negotiate a better deal. Other NCAs disagreed and argued that the negotiated trade waiver would harm price formation and it would result in free riding (negotiating a better deal based on the pre-trade transparency displayed by others).1 The concerns of these NCAs were especially severe for negotiated trades that were relevant for price formation (not negotiated trades based on specific conditions, such as portfolio trades).2 Another point of concern was that the reference price waiver was also used to provide better prices (price improvement) for small trades, instead of only the intended protection against manipulation of reference prices in less liquid markets.3

The contentious nature of the negotiated trade waiver and reference price waiver was also apparent after MiFID I entered into force. The CESR/ESMA waiver process showed dissenting views between NCAs on the negotiated trade and reference price waiver.4 In sum, the negotiated trade and reference price waiver have a track record in being controversial. As will be shown below, the controversy has revived under the MiFID II Review (section VII).