4.III.2.5.3 Level 2 text: standard market size

CESR also assisted the Commission in specifying the ‘standard market size’. The MiFID I Directive required, rather than an individual standard market size for each share, that groups of shares would be created with the same standard market size (reflecting the aim to provide a simple regime, rather than a more accurate, but complex regime for each individual share).1 The challenge for CESR was to find a balance that would provide the best number of groups. On the one hand, a greater amount of groups would be more representative, since the groups would be more granular (i.e. the group would not be too low for shares with an average traded size at the top of the group and not too high for shares with an average trade size at the bottom).2 On the other hand, a lower number of groups could enable market participants to properly manage the SI-obligations, given the reduced complexity.3

The consultation of CESR attracted a range of answers with respect to the appropriate number of classes. Some respondents considered that the number of classes should not exceed five or six to remain manageable. Others argued that the number of classes was not a real issue, since the systems could easily be adjusted and accommodate a large number of scales.4

CESR’s response reflected a compromise. On the one hand, CESR proposed an indefinite amount of groups that would expand in terms of standard market size compared with the average value of transactions of the class.5 This view was aligned with the perspective of those responding systems could easily be adjusted to a large number of scales. That being said, CESR acknowledged the importance of simplicity and an approach that was readily understood. For this reason, CESR recommended a simple tiering in bands of EUR 10.000 up to EUR 50.000 and in EUR 20.000 bands above that figure to accommodate the effective distribution of average order values.6

CESR also recommended that the determination of the standard market size for each class needed to be simple. CESR therefore suggested the standard market size to be set at the mid-point of each band (e.g. the mid-point of the EUR 20.000 – 29.999 band would be 25.000). By contrast for the first band (i.e. 0-9.999), CESR suggested that the standard market size would be EUR 7.500. This was, among other things, to ensure that the standard market size for the first band was consistent with other MiFID I concepts for SIs, namely the ‘size of orders customarily undertaken by a retail investor’ (see paragraph 3 below).7 The latter approach, being simplicity for the groups and standard market size, accommodated the view of those respondents requesting a manageable amount of groups.

CESR too considered whether there were advantages in converting the monetary standard market size into a number of shares. The main benefits of this approach would be that investment firms dealing on own account (including SIs) generally prefer to work with a number of shares and would have no ongoing need to calculate whether any dealing quantity exceeded the monetary standard market size.8 Despite these advantages, CESR noted that such an approach would also imply that the standard market size needed to be converted and accordingly would lose the benefit of simplicity provided by grouping the shares into classes altogether. For this reason, CESR did not suggest converting the monetary value of the standard market size into shares.9

The Commission adopted CESR’s proposal. This was evident in the final MiFID I text. Similar to CESR’s proposal, the MiFID I Implementing Regulation covered an indefinite amount of groups in conjunction with predetermined classes for the average value of transactions. MiFID I set the standard market sizes at the mid-point of the average value of transactions (e.g. EUR 10.000-19.999 was a standard market size of EUR 15.000), save for the exception of the first group (i.e. EUR 0-9.999 was a standard market size of EUR 7.500). The monetary value of the standard market size was not converted into shares.10