5.III.2.6.3 Level 2 text: new details for the standard market size-definition

The standard market size-concept for liquid shares stems from MiFID I. Similar MiFID I, the MiFID II standard market size is in place to balance between the objective of pre-trade transparency versus the position risks of SIs. The concept of a standard market size was introduced under MiFID I. During the MiFID II drafting process the concept of a standard market size was not questionable per se. The standard market size was seen as a useful threshold for (i) the minimum quoting obligation of 10 percent and (ii) firm two-way quote obligation (i.e. bid and offer).1 The main changes from MiFID I to MiFID II took place through the drafting of the level 2-measures. MiFIR required ESMA to submit draft regulatory technical standards on the meaning of the standard market size to the Commission.2

ESMA analyzed share data submitted to the MiFID I Database. The main findings of ESMA were that the number of shares falling within the smallest MiFID I class of average value of transactions (i.e. AVT below EUR 10.000) had risen from less than 35 percent in 2008 to over 95 percent 2013. In addition, the average standard market size in the smallest class had declined from EUR 7,600 in 2008 to EUR 3,700 in 2013.3 In other words, the size of transactions had dropped in the period from 2008 to 2013.

Based on the finding, ESMA considered three options for the standard market size. The three options were:

ESMA preferred the second or third option, that is – to create a single class with an average value of transactions between EUR 0-20.000 and set a higher standard market size at EUR10.000 (instead of EUR 7.500 under MiFID I) (option 2); or maintain the status quo (option 3). ESMA noted that options (2-3) were valid for two reasons. First, one of the explicit goals of MiFID II is to increase transparency. ESMA noted that lowering the standard market size would seem counter to that objective.5 Second, ESMA stated that, despite the lower transaction sizes, arguably trading patterns were atypical since 2007/2008 following the financial crisis of 2007/2008. Setting a lower standard market size would reinforce these patterns rather than aim to improve transparency.6

Respondents to ESMA’s consultation were divided between those requesting more stringent thresholds for SIs and those arguing for a more accommodating SI-regime.7 As a response, ESMA decided to go for option (2), which would increase the thresholds for a standard market size and therewith pre-trade transparency from SIs. In ESMA’s view, option (2) represented the best possible compromise between the conflicting views of the respondents.8

The Commission adopted ESMA’s proposal. This is apparent in the final MiFID II text. Similar to ESMA’s proposal, MiFID II covers a standard market size-table that provides as the smallest class an average value of transactions of EUR 0-20.000 and a standard market size of EUR 10.000.9MiFID II also covers the additional other classes, as well as the related standard market size, as proposed by ESMA.10