5.III.3.1 General

MiFID II requires SIs to execute the orders they receive from their clients in relation to equity instruments for which they are SIs at the quoted prices at the time of reception of the order.1 SIs, in other words, need to take a mandatory risk position (so-called ‘making a market’) for the equity instruments in relation to which they publish firm quotes. Under MiFID I a similar requirement was in place. The rationale behind the requirement is to ensure that the prices published provide meaningful information to clients and to the wider market by being firm up to the attached size.2

There is an exception to the requirement. Similar to MiFID I, under MiFID II SIs are permitted to provide price improvements where certain conditions are met.3 In justified cases SIs may execute the quoted prices at a better price, provided that the price falls within a range close to market conditions.4 The criterion ‘prices falling with a public range close to market conditions’ is in place to ensure that execution by SIs contributes to price formation, whilst not impeding on the possibility for SIs to offer price improvement in justified cases.5MiFID II defines ‘that a price falls within a public range close to market condtions’ by means of a delegated regulation.6 The term ‘justified cases’ is not specified. NCAs need to check compliance of SIs with the pricing conditions for price improvement.7

The conditions for price improvement (i.e. price improvement within a range close to market conditions) do not apply in all situations. The MiFID II conditions do not apply in relation to: (a) orders from professional clients for (b) transactions where execution in several securities is part of one transaction (portfolio trade) or (c) orders that are subject to conditions other than the current market price.8 In this situation, SIs are permitted to provide price improvements without being subject to a price range. The logic here is that these orders do not contribute to price formation. Accordingly, price improvements can be made without pricing conditions.

New under MiFID II is that the possibility of price improvements is also available for retail clients. MiFID I only permitted price improvements for professional clients (in relation to orders above customary retail size). MiFID II expands the scope to retail clients to ensure retail clients can now also benefit from price improvements of SIs. This results, among other things, in a better execution price for the retail client.9

The extension in scope also protects SIs to a greater extent compared to MiFID I. Under MiFID II SIs can easier publish a wider spread (difference between bid and offer quotes) for retail clients, thereby reducing the SI position risks. Although beneficial for retail investors and SIs, the extension in scope can result in less pre-trade transparency compared to MiFID I. This is because the quotes published by SIs do not always represent the final price (i.e. price improvements are possible).10MiFID II takes this downsides for granted, as reflected in the MiFID II SI regime for price improvements.11

Similar to the previous regime, MiFID II provides quote execution rules for the situation of an SI quoting only one quote or whose highest quote is lower than the standard market size. Where an SI receives an order from a client of a size bigger than its quotation size, but lower than the standard market size, MiFID II states that the SI may decide to execute that part of the order that exceeds its quotation size, provided that it is executed at the quoted price. An exception to the foregoing is in place where price improvements as stipulated by MiFID II are permitted.12 Where the SI is quoting in different sizes and receives an order between those sizes, which it chooses to execute, the SI needs to execute the order at one of the quoted prices.13 Also here an exception is where MiFID II permits price improvements.14 The rule has remained unchanged compared to MiFID I.