5.VII.1.2.4.1 Eliminate the four percent-threshold and tighten the EU level threshold (proposal 1)

ESMA proposes to eliminate the four percent-threshold of the double volume cap (individual RM/MTF level) and to tighten the EU level threshold from eight to seven percent. The proposal is the result of the ESMA aim to make the regime simpler and more transparent. ESMA asked for input during the consultating process on how to make the double volume cap system less complex. One of the proposals of ESMA was to remove the four percent-threshold. The large majority of respondents to the ESMA consulation supported to eliminate the four percent threshold (individual RM/MTF level) and keep the EU level threshold at eight percent (in case the double volume cap is not deleted, see paragraph 1.2.1 above). The argument here is that the four percent threshold adds unnecessary complexity to the double volume cap (RMs and MTFs need to monitor trading under the waivers taking place on their venues) whilst no tangible benefit is provided to the market structure or end investors.1 In addition, less liquid shares are usually only admitted to trading on one or a few dark venues, despite all venues being able to list those securities. As a consequence, the four percent threshold is reached quickly when it comes to less liquid shares.2

Against this background, ESMA proposes to remove the four percent-threshold of the double volume cap. If accepted, the result would be the end of the double volume cap mechanism (i.e. a single volume cap). ESMA argues that after the suspension of dark trading on an RM/MTF (four percent), dark trading is redistributed to the other dark pools, which results in a breach of the eight percent threshold. In other words, ESMA believes that the four percent threshold does not discourage dark trading and for this reason wants to remove the four percent threshold.3 Nonetheless, in order to compensate the deletion of the four percent threshold, ESMA proposes to lower the EU level threshold from eight to seven percent.4 The rationale here is to increase equity pre-trade transparency.