EU Equity pre- and post-trade transparency regulation (LBF vol. 21) 2021/5.II.2.4.2:5.II.2.4.2 Definition of a large in scale order

EU Equity pre- and post-trade transparency regulation (LBF vol. 21) 2021/5.II.2.4.2

5.II.2.4.2 Definition of a large in scale order

Documentgegevens:

mr. J.E.C. Gulyás, datum 01-02-2021

Datum: 01-02-2021
Auteur: mr. J.E.C. Gulyás
JCDI: JCDI:ADS266936:1
Vakgebied(en): Financieel recht / Bank- en effectenrecht
Financieel recht / Europees financieel recht
Financiële dienstverlening / Financieel toezicht

Similar to MiFID I, MiFID II covers a definition of what constitutes a ‘large in scale order’. A MiFIR Delegated Regulation distinguishes between three categories of ‘large in scale orders’ depending on the equity instrument in question. MiFID II covers the following three categories for large in scale orders, namely: (1) shares and depositary receipts, (2) certificates and other similar financial instruments, and (3) ETFs. The first two categories (shares, depositary receipts, and certificates, and other similar financial instruments) are considered to be large in scale where the order is equal to or larger than the minimum size of orders set out in respectively: (a) the MiFID II table for shares and depositary receipts and (b) the MiFID II table for certificates and other similar financial instruments.1 The MiFID II tables cover several classes of (i) average daily turnover for the instrument in question in relation to (ii) the minimum order size.2 Different tables apply depending on whether the instrument is a share/depositary receipt or a certificate/other similar financial instrument. ETFs do not have a specific MiFID II-table with average daily turnovers. Instead, MiFID II determines that an order in respect of an ETF is considered to be large in scale where the order is equal to or larger than EUR 1.000.000 (i.e. no average daily turnover is used, but only a minimum order size).3

Besides the increase in scope, MiFID II provides additional classes of average daily turnover for shares (and depositary receipts) compared to MiFID I. MiFID I covered five classes of average daily turnover, whereas MiFID II covers eight.4 In a nutshell, the additional MiFID II classes are created on (i) the ‘illiquid’; (ii) the ‘moderately liquid’; and (iii) the ‘super liquid’ end of the scale.5 The aim here is to allow for the thresholds to be set more accurately to the actual liquidity of the share in question.6 A consequence of the MiFID II approach is that the thresholds for shares have been reduced compared to MiFID I. This means that under MiFID IIsmaller share orders sizes are eligible for the large in scale-waiver compared to MiFID I. The reason for this is that order sizes from MiFID I to MiFID II have decreased, in particular due to algorithmic trading (for a detailed examination, see paragraph below).7 ESMA has provided guidance in order to determine the price to be used for the determination of the order size (e.g. a limit order versus a quote).8

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Art. 7(1) MiFIR Delegated Regulation 2017/587.

See Annex II Table 1-2 MiFIR Delegated Regulation 2017/587.

Art. 7(2) MiFIR Delegated Regulation 2017/587.

Annex II Table 1-2 MiFIR Delegated Regulation 2017/587.

ESMA, Discussion Paper: MiFID II/MiFIR, 22 May 2014(ESMA/2014/548), p. 88. For the sake of clarity, the reference to ‘liquid’ here does not refer to the legal concept of a ‘liquid market’ under MiFID II.

ESMA, Discussion Paper: MiFID II/MiFIR, 22 May 2014(ESMA/2014/548), p. 88.

ESMA, Discussion Paper: MiFID II/MiFIR, 22 May 2014(ESMA/2014/548), p. 30. Algorithmic trading permits so-called smart order routers to slice large orders (so-called ‘parent orders’) into smaller orders (so-called ‘child orders’). The rationale behind slicing orders is to reduce the market impact (and therewith costs) involved with large orders. See P. Gomber and A. Pierron, MiFID: Spirit and Reality of a European Financial Markets Directive, September 2010, p. 40.

For example, ESMA states that in a request-for-quote trading system, the order size check against the relevant large in scale-threshold should always be performed against the quote (i.e. the response to a request-for-quote) and not against the request as such. For the full guidance, reference is made to ESMA, Opinion on the assessment of pre-trade transparency waivers for equity and non-equity instruments, 16 December 2020(ESMA70-155-6641), p. 6-7.