5.II.2.4.3.2 Level 2 text: clarifications on the scope (stubs)

Another element of the MiFID I-review was the scope of the large in scale waiver, in particular the treatment of residual orders (so-called ‘stubs’). Consider the situation where an large order initially satisfied the relevant MiFID I large in scale-thresholds, but when partially executed, it was reduced to a ‘stub’ that fell below the threshold. CESR issued a consultation in order to assist the Commission in drafting the MiFID II proposal. The majority of respondents to the CESR consultation supported allowing stubs to remain dark. It was argued that this approach suited best with the overall purpose of the waiver, which in their view was to work a large order over the course of the day.1 Contrarily, other respondents noted that it was the intention of waiver to mitigate adverse impact of large orders only (not: stubs).2 CESR itself was divided on the matter, although the majority within CESR agreed to make stubs pre-trade transparent in order to ensure sufficient price formation.3 In the end, CESR left the decision to the Commission. CESR recommended the Commission to take a position whether or not to apply the waiver to stubs.4 The Commission in turn proposed in the MiFID II proposal to clarify the ‘stubs’ issue through implementing regulations (level 2 measures).5 In other words, ESMA was asked to assist the Commission on what approach to take concerning stubs.

ESMA’s advice to the Commission reflected a compromise. ESMA suggested requiring stubs to be made pre-trade transparent, but only where the stub met a certain percentage (e.g. 25 percent of the initial trade).6 In ESMA’s view, such an approach permitted more volume to be pre-trade transparent, while at the same time still providing protection against market impact.7 Overall, respondents did not support ESMA’s proposal. A main reason was that the proposed approach would reduce the ability to execute large orders in a safe manner (i.e. the stubs that needed to be made pre-trade transparent would reveal sensitive information to the market). In addition, the implementation was viewed as too complex. Accordingly, the ESMA proposal was seen as disproportionate in relation to the benefits.8 Based on the feedback received, ESMA changed its view. ESMA suggested the Commission to clarify that stubs fall under the large in scale waiver. In other words, residual orders needed to fall under the scope of the large in scale-waiver.9 The Commission adopted the final view of ESMA. This is apparent in the MiFID II text. Under MiFID II stubs (residual orders) fall under the scope of the large in scale-waiver.10