Einde inhoudsopgave
EU Equity pre- and post-trade transparency regulation (LBF vol. 21) 2021/2.VII
2.VII Bottom-up versus top-down
mr. J.E.C. Gulyás, datum 01-02-2021
- Datum
01-02-2021
- Auteur
mr. J.E.C. Gulyás
- JCDI
JCDI:ADS266683:1
- Vakgebied(en)
Financieel recht / Bank- en effectenrecht
Financieel recht / Europees financieel recht
Financiële dienstverlening / Financieel toezicht
Voetnoten
Voetnoten
IOSCO, Transparency on Secondary Markets: A synthesis of the IOSCO debate, 1996, p. 51.
IOSCO, Market Transparency and Fragmentation, 2001, p. 5. Already in the 1990s ‘(m)any electronic auction exchanges, such as Stockholm and London’s Tradepoint, emphasized publicly the transparency of their systems as a means of attracting order flow (…).’ (B. Steil, The European Equity Markets: The State of the Union and an Agenda for the Millennium, ECMI, 1996, p. 33). In other words, market forces (bottom-up) can (but not necessarily) result in sufficient transparency. See in this context also CEPS, Competition, Fragmentation and Transparency: Providing the Regulatory Framework for Fair, Efficient and Dynamic European Securities Markets – Assessing the ISD Review, 2003, p. 44 and p. 83.
CESR, Standards for Alternative Trading Systems, July 2002(CESR/02-086b), p. 10.
See, for example, Steil who notes that the quotes can be set so wide that ‘they serve merely as public advertisements for dealer services’ (rather than a firm indication at which price/volume the investment firm is willing to trade) (B. Steil, The European Equity Markets: The State of the Union and an Agenda for the Millennium, ECMI, 1996, p. 34). A somewhat similar observation was made by CESR in reviewing the quoting activity of SIs under MiFID I. CESR observed that many SIs were publishing quotes that told the market little about the size of business the SIs were prepared to take on (CESR, Consultation Paper: Technical Advice to the European Commission in the Context of the MiFID Review – Equity Markets, April 2010(CESR/10-394), p. 14). See also CEPS, Competition, Fragmentation and Transparency: Providing the Regulatory Framework for Fair, Efficient and Dynamic European Securities Markets – Assessing the ISD Review, 2003, p. 44.
T. Foucault, M. Pagano, and A. Röell, Market Liquidity: Theory, Evidency, and Policy, 2014, p. 298-299.
Even if one determines what the ‘optimal’ degree of equity pre-trade transparency is, one should wonder how this is best achieved. Should the desired degree of equity pre-trade transparency be achieved through market forces (i.e. bottom-up), regulation (i.e. top-down), or a combination of both? It can be argued that the market itself knows best what degree of equity pre-trade transparency is preferable. Hence, the decision whether or not to publish pre-trade data should be left to the market. According to this view, trading platforms (e.g. RMs or MTFs) are well placed to balance between the costs and benefits of different levels of market transparency. Consequently, a self-regulatory approach (bottom-up) would be superior to a regulatory approach (top-down).1 Furthermore, according to this view, there are sufficient incentives for trading platforms to publish equity pre-trade data. The reason here is that the publication of such information attracts liquidity2 and the data can be sold as well.3
One can also take a different perspective. It can be argued that market forces alone are insufficient to ensure adequate equity pre-trade transparency. Investment firms trading on own account (e.g. so-called market makers)4 might only want to publish indicative (not: firm) quotes in small sizes, since this enables to protect their positions. Investment firms trading with their own capital would in effect publish only equity pre-trade data with little meaning to the market, since the quotes are indicative and in small sizes.5 One must also take into account that having pre-trade data, whilst others do not, gives an informational advantage. The ability to gain from such an informational advantage (so-called ‘rent extraction’) diminishes after pre-trade data publication.6 Regulatory intervention might therefore be necessary to ensure there is sufficient equity pre-trade transparency.
Both camps have valid arguments. It can be argued that reliance on market forces (i.e. bottom-up) or regulatory intervention (i.e. top-down) is necessary to establish the optimal degree of equity pre-trade transparency (or a combination of both). It is ultimately a matter of market philosophy (i.e. market-shaping (top-down) versus market-facilitating (bottom-up)) what constitutes the ‘right’ approach.