EU Equity pre- and post-trade transparency regulation (LBF vol. 21) 2021/4.III.2.2:4.III.2.2 Liquid market

EU Equity pre- and post-trade transparency regulation (LBF vol. 21) 2021/4.III.2.2

4.III.2.2 Liquid market

Documentgegevens:

mr. J.E.C. Gulyás, datum 01-02-2021

Datum: 01-02-2021
Auteur: mr. J.E.C. Gulyás
JCDI: JCDI:ADS266414:1
Vakgebied(en): Financieel recht / Bank- en effectenrecht
Financieel recht / Europees financieel recht
Financiële dienstverlening / Financieel toezicht

As noted above, MiFID I required SIs to publish firm quotes for those shares admitted to trading on an RM only for which there was a ‘liquid market’ (when dealing in sizes up to standard market size).1 MiFID I introduced a definition of a ‘liquid market’. The directly applicable MiFID I Implementing Regulation specified the meaning of a liquid market.2 The MiFID I Implementing Regulation specified that a share had a liquid market if:

a): the share was traded daily;
b): the share was traded with a free float3 not less than EUR 500 million, and one of the following conditions under (c-d) was satisfied;
c): the average daily number of transactions in the share was not less than 500; and/or
d): the average daily turnover for the share was not less than EUR 2 million.4

The MiFID I-text illustrated that, in contrast to the requirement of being traded daily and the free float, the criteria of (c) and (d) were not both mandatory. Instead, as a minimum MiFID I required only one of the criteria, criterium (c) (average daily number of transactions) or (d) (average daily turnover), to be fulfilled. MiFID I provided a provision that permitted a Member State to require as a maximum to have both the criteria of (c) and (d) to be fulfilled in order to have a liquid market for a share.5 In effect, the MiFID I-provision did not provide for total harmonisation when it came to the harmonisation of a liquid market for shares.6

MiFID I permitted Member States to override the above-mentioned criteria in defining a liquid market under (a-d) where the total number of liquid shares in the Member State was less than five. Here, a Member State could itself specify the minimum number of liquid shares for its jurisdiction. The minimum number of liquid shares could not be greater than five.7 In other words, MiFID I gave some flexibility to Member States (with a relatively illiquid market compared to the relatively liquid Member States) to designate liquid shares themselves.8

The aim of the MiFID I-definition of a liquid market was to balance between (1) sufficient pre-trade transparency and (2) SI position risks. A strict liquid market-definition (i.e. low threshold) would be beneficial for pre-trade transparency and harmful for SIs, since SIs would be required to publish firm quotes relatively fast. The situation would be the other way around with a lenient liquid market-definition. A lenient liquid market-definition (i.e. high threshold) would mean that the SI was not quickly required to publish a firm quote, meaning that there was less pre-trade transparency and a better protection of SI position risks. In sum, MiFID I intended to find an equilibrium between the merits of pre-trade transparency versus the position risks of SIs.9

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Art. 27(1) MiFID I.

The definition of a size up to standard market size (point 2) is examined below (paragraph 2.3).

MiFID I noted that the free float excluded holdings exceeding five percent of the total voting rights of the issuer, unless such a holding was held by a collective investment undertaking or a pension fund (art. 22(4) MiFID I Implementing Regulation). CESR further clarified through formally non-binding guidance that the free float was the market capitalisation (i.e. outstanding shares multiplied by the share price) minus excluded holding exceeding five percent of the total voting rights (unless the holding was held by a collective investment undertaking or pension fund) (CESR, Guidebook on MiFID market transparency calculations, May 2007 (CESR/07-322), p. 2). For an examination of the operational nature of the calculation – including the average daily number of transactions and average daily turnover – reference is made to section V below.

Art. 22(1) MiFID I Implementing Regulation.

That notice needed to be made public (art. 22(1) MiFID I Implementing Regulation).

CESR, Technical Advice: MiFID I, April 2005, p. 61-62.

Art. 22(2) MiFID I Implementing Regulation. See also ESMA, Consultation Paper: MiFID II/MiFIR, 22 May 2014(ESMA/2014/549), p. 175.

Reference is made to CESR, which observed that until May 2008 only Estonia, Cyprus, Lithuania, and Romania designated shares as liquid (CESR, Use of the Criteria Defined in Art. 22 of the Commission Regulation (EC) No 1287/2006 to Determine Liquid Shares, May 2008 (CESR/08-316)).

Reference is made to ESMA, Consultation Paper: MiFID II/MiFIR, 22 May 2014(ESMA/2014/549), p. 176. For an examination of the background of the MiFID I liquid market-definition, reference is made to paragraph 2.5 below.