5.III.1.2.1 Frequent and systematic basis

One of the two quantitative thresholds of the SI definition is whether internalisation (i.e. executing a client order by trading on own account) occurs on a ‘frequent and systematic’ basis. MiFID II indicates that the frequent and systematic basis needs to be measured by the number of OTC trades in the financial instrument carried out by the investment firm. MiFID II does not provide a definition for ‘OTC’ trades, but the provision suggests that all equity trading outside RMs and MTFs must be considered as OTC (including the trading conducted by SIs).1

A directly applicable MiFIR Delegated Regulation specifies the terms ‘frequent and systematic’.2 The MiFIR Delegated Regulation makes a distinction between a frequent and systematic basis for (1) equity instruments for which there is a liquid market and (2) equity instruments for which there is not a liquid market.3 A frequent and systematic basis for an equity instrument for which there is a liquid market is in place where during the past 6 months: (i) the number of OTC transactions carried out by it on own account when executing client orders (the so-called ‘numerator’) is equal to or larger than 0.4 percent of the total number of transactions in the relevant instrument executed in the EU on any trading venue or OTC (volume traded on all EU venues or OTC: the so-called ‘denominator’) during the same period and (ii) the OTC transactions internalised take place on average on a daily basis.4

A less data intense regime is in place for equity instruments without a liquid market. In the case of illiquid equity instruments, the following regime applies: a ‘frequent and systematic basis’ is met where: (1) during the past 6 months the internalised OTC transactions take place (2) on average on a daily basis.5