Response to ESMA on the transparency regime for equity and equity-like instruments

The objective of MiFID II/MiFIR was to significantly improve transparency for equity instruments by bringing more trading to lit multilateral trading venues, i.e. Regulated Markets (RMs) and Multilateral Trading Facilities (MTFs) to improve price formation and investor protection. However, more than two years after the implementation of MiFID II/MiFIR, the situation is at odds with the spirit of the legislation.

Against this background, FESE proposes a simplified market structure concept designed to strengthen lit markets by:

  • building market models that buttress price formation rather than fragment it,
  • making markets more inclusive, especially for local intermediaries in smaller markets, and
  • offering investors (big or small) better ways of interacting with multilateral markets.

In order to achieve this, FESE proposes to use the large in scale (LIS) threshold as the main tool to delineate lit and dark trading. Above LIS trading constitutes a legitimate dark space in which trades are not subject to pre-trade transparency and benefit from delayed post-trade transparency. This applies to both multilateral trading venues (RMs and MTFs) and bilateral execution venues (SI). Our proposal aims to simplify the fragmented execution landscape, as below LIS, trades should contribute to price formation since those trades have at most only limited market impact. This type of execution should operate in a trading venue, under non-discretionary and non-discriminatory rules, and comply with the tick size and transparency regimes. OTC would be restricted to trades not subject to the share trading obligation (STO).

There would therefore no longer be a need for a double volume cap (DVC) mechanism in such a scenario, since pre-trade transparency waivers would be limited to the LIS waiver which protects from market impact and the order management facility (OMF) waiver as orders in an OMF facility ultimately become pre-trade transparent and therefore contribute to the price formation process.  

Lastly, in an attempt to improve data reporting standards and facilitate the ‘consolidatability’ of data, FESE suggests applying the industry-led initiative Market Model Typology (MMT) to all trading venues, execution venues as well as to OTC transactions under the governance of ESMA.