5.VII.2.2.2 Methodology for the standard market size

Under MiFID II SIs need to comply with equity pre-trade transparency requirements when dealing in sizes up to the standard market size and to make public quotes for sizes of at least 10 percent of the standard market size.1 ESMA indicated in the consultation paper that the current MiFID II quoting size ‘leads to very small quoting sizes in the majority of cases and as a consequence to only limited mandatory transparency for SIs’.2 To change the situation and increase pre-trade transparency for SIs, ESMA provides two proposals in the MiFID II Review. The ESMA proposals are the following:

The ESMA proposals are based on the ESMA consultation, including the feedback received. ESMA proposed in the consultation paper to increase the minimum quoting size for SIs to either (a) 50 percent or (b) 100 percent of the standard market size.3 The large majority of respondents support the ESMA proposal of a higher minimum quoting size set to 100 percent of the standard market size. ESMA notes in the MiFID II Review that most of the instruments fall in the smallest bucket of the standard market size. The result is that SIs are required to quote at a minimum of EUR 1,000 only, which leads to very limited transparency. Against this background, ESMA proposes to increase the minimum quoting size for SIs to 100 percent of the standard market size.4

ESMA also proposed in the consultation paper to change the methodology to determine the standard market size. Under MiFID II the standard market size is based on the average value of transactions. ESMA proposed to instead determine the standard market size on the basis of the average daily turnover.5 The rationale here is to align the standard market size of SIs with the MiFID II system for determining large in scale-orders on RMs/MTFs.6 There was no clear majority among respondents on amending the methodology for the standard market size. RMs and MTFs and some trading associations supported the change, whereas sell-side firms and fund managers predominantly opposed the proposal. A main argument to oppose the ESMA proposal is that SIs are fundamentally different from RMs and MTFs. Increasing the standard market size so that SIs need to quote in large sizes, beyond the best bid/offer in the order books of RMs and MTFs, would put SIs at a competitive disadvantage to on-venue (RM/MTF) participants. This is because the latter could quote different price levels.7

The final view of ESMA is a somewhat of a compromise. On the one hand, ESMA proposes to change the methodology to determine the standard market size for SIs according to the average daily turnover (i.e. a stricter SI regime that is aligned with RM/MTF large in scale-threshold). On the other hand, ESMA leaves the current EUR value for the standard market size open. In other words, stakeholders can engage with ESMA to discuss the EUR value for the standard market size for shares, depositary receipts, ETFs, certificates and other equity-like instruments, as relevant for the SI regime.8