4.III.3.2.2 Level 2 text: determining the size customarily undertaken by a retail investor

As examined, MiFID I permitted SIs to offer price improvements to professional client under certain conditions. A relevant thresholds was that the transactions needed to be of ‘a size bigger than the size customarily undertaken by a retail investor’.1 CESR assisted the Commission in specifying the threshold concept. CESR noted that the objective was to allow for ‘a clear, simple, and uniform identification of the size customarily undertaken by a retail investor’. In CESR’s view such criteria (a) would allow intermediaries operating as SIs to be clear as to the minimum size of order from professional clients that would be eligible for price improvement; (b) would make regulators’ enforcement activities easier and more effective; and (c) would reduce the likelihood of abusive practices.2

Due to the unavailability of data, CESR made estimations based on criteria informed by such evidence on retail transactions as was available.3 CESR considered whether the size needed to be (i) fixed individually for each share; (ii) for classes of shares; or (iii) as a single figure applicable for all shares. In CESR’s view, an individual figure for each share would likely make the system too complicated and it was also not clear at the time whether using the standard market size (i.e. classes of shares: see paragraph above) would adequately reflect the differences in typical retail sizes. In effect, CESR preferred a single threshold for all shares.4

Based on the estimates, CESR noted that the ‘typical retail order’ was considerably different across the individual markets within the EEA. The smallest figures were around EUR 2.000-3000, whereas the highest ranged above EUR 10.000 and even EUR 40.000.5 CESR Members had different views about the number at which the threshold needed to be set. Some argued to set the figure at the highest (or close to it) size of retail trades in the EU. These members believed that such an approach was necessary to ensure investor protection and to avoid discriminatory treatment (i.e. more investors would be treated the same, since less price improvements would be possible).6 Contrarily, other CESR Members argued that finding an appropriate balance between the protection of retail investors and negotiating freedom for professional investors (who often also need to deal in relatively small sizes), the figure needed to be set rather close to the average of the retail trade sizes across the EU.7

The respondents to CESR’s consultation overall preferred the use of a single fixed threshold. The reasons were that the single fixed threshold would simplify operations and make it easier for SIs to perform their obligations.8 However, the feedback was mixed with respect to the level of the threshold. Some believed that the threshold size needed to be set at the highest level. In their view, this would produce the greatest possible transparency and cover the entire range of retail customers, thereby ensuring the greatest possible representativeness.9 Others argued that the retail size needed to be derived from the size of the average retail trade in the EU.10 CESR’s final advice reflected a combination of both views, that is - CESR recommended (1) a single EU-wide figure and (2) set at the EUR 7.500.11

The Commission adopted CESR’s proposal. This was apparent in the the final MiFID I text. The MiFID I Implementing Regulation – similar to the CESR proposal – determined the size of an order customarily undertaken by a retail investor through a single fixed threshold for all shares at EUR 7.500.12