4.III.5 Concluding remarks

MiFID I introduced equity pre-trade transparency rules for SIs. The regime was part of the broader MiFID I framework to promote competition between trading venues, being RMs, MTFs, and SIs. On the one hand, a high degree of pre-trade transparency from SIs was seen as essential to ensure a level playing between RMs, MTFs, and SIs, that the price formation mechanism in shares was not impaired by fragmented liquidity, and investors thereby not penalised. On the other hand, MiFID I recognised the distinct position risks of SIs, a situation that made them different compared to RMs and MTFs. The regime was overall less strict compared to the pre-trade transparency framework for RMs and MTFs. Although not entirely clear due to political compromise, MiFID I aimed to balance between the position risks of SIs on the one hand and the merits of pre-trade transparency publication on the other hand.

The MiFID I approach was somewhat in between a top-down and bottom-up approach. In terms of top-down elements, MiFID I intended to leave little flexibility as to the pre-trade data that SIs needed to publish. The intention here was to compensate for the potential negative effects of the competitive MiFID I approach, such as liquidity fragmentation and a harmed level playing field. To achieve its objectives, MiFID I introduced highly harmonised equity pre-trade transparency rules for SIs, in particular through the detailed framework directive (MiFID I Directive) and maximum harmonised provisions. The intention of the amount of detail and harmonisation were to converge pre-trade transparency standards for SIs across the EEA.

MiFID I also covered several bottom-up elements. First, the MiFID I definition of SIs was qualitative in nature. This gave discretion with respect to interpreting the SI-concept. Second, the scope of the MiFID I pre-trade transparency regime was limited to shares admitted to trading on an RM. Third, the obligation to publish firm quotes only applied in a specified size for liquid shares. Fourth, SIs were free to choose to quote one-way or two-way quotes and no minimum quoting size applied. Fifth, SIs were within certain boundaries free to provide price improvements and to choose their clients. The result was that MiFID I left substantial scope for investment firms to fall outside the SI pre-trade transparency regime. Where an investment firm did fall within the SI framework, MiFID I gave substantial flexibility not to publish firm quotes, that is – discretion in being dark. The MiFID I exceptions made SIs somewhat similar to the dark pools operated on RMs and MTFs. In effect, one could say that SIs under MiFID I were semi-dark pools.1