EU Equity pre- and post-trade transparency regulation (LBF vol. 21) 2021/5.II.2.2.4:5.II.2.2.4 Liquid market

EU Equity pre- and post-trade transparency regulation (LBF vol. 21) 2021/5.II.2.2.4

5.II.2.2.4 Liquid market

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The MiFID II definition of a liquid market is relevant for the negotiated trade waiver.1 As noted in the paragraph above, negotiated trades that concern liquid markets (and that contribute to price formation) are subject to the double volume cap mechanism. The double volume cap does not apply to negotiated trades with respect to illiquid markets.2MiFID II intends to find a balance. On the one hand, MiFID II has introduced the double volume cap to improve price formation by reducing the use of the negotiated trade waiver (and the reference price waiver).3 On the other hand, the MiFID II double volume cap only applies to negotiated trades concerning liquid markets. This reflects the aim to support trading activity in illiquid markets (i.e. enable unlimited use of the negotiated trade waiver for illiquid markets).

The framework MiFID II-definition of a liquid market can be found in MiFIR (Level 1 text). MiFIR covers a definition of a ‘liquid market’ both for equity and non-equity instruments. MiFIR notes that there is a liquid market for equity instruments when: (a) an equity instrument is traded daily and the market is assessed according to the following criteria: (b) the free float; (c) the average daily number of transactions in those equity instruments; and (d) the average daily turnover for those equity instruments.4 The four criteria (a-d) are the same as under MiFID I.5 There are also differences. MiFID II makes six changes compared to MiFID I:

1.

The MiFID II definition applies to all equity instruments (admitted to trading on an RM or traded on an RM or MTF), instead of merely shares (admitted to trading on an RM), which was the case under MiFID I. MiFID II covers a specific determination of a liquid market is in place depending on whether the equity instrument is (1) a share or depositary receipt;6 (2) an ETF;7 or (3) a certificate.8

2.

The criteria are all mandatory under MiFID II. Under MiFID I Member States had the flexibility to apply both the criteria of the average daily number of transactions (condition c) and/or the average daily turnover (condition d).

3.

MiFID II tightens the share criteria compared to MiFID I. MiFID II covers a free float of (i) EUR 100 million (EUR 500 million under MiFID I); (ii) an average daily number of transactions of 250 (500 under MiFID I); and (iii) an average daily turnover of EUR 1 million (EUR 2.5 million under MiFID I).9 The tightened liquid market concept means that MiFID II applies pre-trade transparency rules for shares sooner compared to MiFID I.

4.

The main MiFID II definition of a liquid market is laid down in MiFIR (Level 1). The details specified in a MiFIR Delegated Regulation (Level 2). Under MiFID I the entire definition of a liquid market was laid down in the MiFID I Implementing Regulation.

Similar to MiFID I,10MiFID II permits a Member State to override the liquid market-criteria under where the total number of liquid shares in its jurisdiction is less than five.11 In this situation, the NCA of the relevant Member State is permitted to specify the number of liquid instruments for that Member State. MiFID II notes that this is only possible where (i) the total is not greater than five and (ii) the specification is made public.12 The rationale of the MiFID II provision is to permit Member States with relatively illiquid markets to designate liquid markets themselves, and hence ensure a stricter application of the MiFID II negotiated trade waiver (and other MiFID II pre-trade transparency obligations).13

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