4.III.3.2.1 Level 1 text: main obligation and thresholds

The Commission initiated the quote execution rule in drafting MiFID I. The Commission’s MiFID I proposal required investment firms authorised to deal on own account (when trading in a specified size for a liquid share) to trade with (a) other investment firms and eligible counterparties at (b) the advertised prices.1 The Commission’s proposal was fairly strict, as it required the investment firm in question to trade with (1) a broad group of parties (i.e. other investment firms and eligible counterparties) and (2) no price improvements were available. The Commission’s proposal reflected the aim to expand the information on current opportunities to trade by making the quotes executable for a broad audience, while the types of pre-trade information to be published (the quotes) would be highly meaningful (i.e. the quotes published were firm at the published price).2

Both the European Parliament and Council made modifications to the Commission’s proposal. The European Parliament suggested to limit the audience of the quote execution-rule. The European Parliament wanted to apply the rule to the clients of the SI only, instead of ‘other investment firms and eligible counterparties’.3 The European Parliament therewith wanted to protect the exposure of SIs by limiting the group that could execute at the quotes published. In addition, the Council proposed to add the possibility of permitting price improvements to professional clients under certain conditions. The Council’s position enabled SIs to publish a relatively broad spread (i.e. protect against position risks) while being able to offer potential price improvements (i.e. being able to offer a better price at a later moment).4 The position of the Council reflected a compromise. Retail investors and all orders up to customary retail size would be excluded from price improvements by SIs. The rationale for such a restriction on price improvement was to provide for equal treatment of retail clients of SIs and for making the quotes displayed to retail investors and up to customarily retail size meaningful (i.e. the quotes published could be executed at that price).5

The complex negotiation process was evident in the final MiFID I text. MiFID I in principle required SIs to publish firm quotes, but these could only be executed by their clients. In addition, exceptions were in place in the form of price improvements. SIs were permitted to provide price improvements for professional clients, provided that certain conditions were met. The Council wanted the Commission to specify the size customarily undertaken by a retail investor through level 2-measures.6 The delegation to the Commission was apparent in the final MiFID I text.7