4.III.2.5.2 Level 2 text: liquid market

CESR assisted the Commission in specifying the transparency threshold of a liquid market for the level 2 MiFID I text. CESR’s proposal incorporated thresholds for the size of the so-called free float market capitalisation of a share and the level of trading activity. In CESR’s view, first all shares needed to meet the common criteria of being traded daily and having a free float market capitalisation of more than EUR 500 million.1 Second, the average daily trading activity in the share needed to exceed 500 trades or EUR 2 million. CESR proposed that each Member State would be free to determine which measure of trading activity it would use and apply only that measure in assessing all its shares.2

Several respondents criticised the CESR view, because it allowed Member States to choose one of the criteria for determining liquid shares (i.e. number of trades or daily turnover). In view of these respondents the optionality would not establish a level playing field. Neither would it support the objective of creating an integrated EU equity market. The majority of these respondents argued in favour of cumulative criteria without a discretionary judgement by Member States.3

CESR reacted that it was difficult to find common EEA thresholds that could be used cumulatively. CESR noted this was the case since market structures in the EEA differed.4 CESR considered that the advantages of a ‘one size fits all’ approach would not compensate for the constraints that ‘would cause the majority of European markets to experience’. These matters taken into consideration, CESR considered that allowing some flexibility in implementation would still enable the MiFID I goals to be met.5

CESR also explored whether a liquid market needed to be determined on the basis of a single marketplace/Member State liquidity or on the basis of EU-liquidity. A single marketplace/Member State approach would suit with the situation at the time of drafting MiFID I. At the time, many shares were still traded in one marketplace or in one Member State (ISD situation).6 That being said, CESR was aware that other MiFID I provisions in MiFID I (i.e. the determination of the standard market size, see paragraph 2.3 and 2.5.3) required all orders executed in the EU to be taken into account. Under this reading, CESR was required to base a ‘liquid market’ on EU liquidity (i.e. similar to the provision of a ‘standard market size’).7

Certain respondents to the CESR consultation suggested that NCAs needed to be able to specify their top liquid shares as liquid (i.e. a single marketplace/Member State approach). In their view, CESR’s proposed criteria would result in some markets having no liquid shares within the meaning of MiFID I. However, in the end CESR decided that a national approach to the definition of a liquid market would not accord with a level playing field in the EU. CESR therefore proposed a liquid market to be assessed on the EU-level.8

The Commission largely adopted CESR’s proposal. The flexible thresholds for determining a liquid market were adopted. In addition, the Commission required the concept of a liquid market to be assessed at the EU-level (instead of a single marketplace/Member State). This follows from the MiFID I Implementing Regulation, which covered similar provisions.9 The Commission ‘largely’ adopted CESR’s proposal, since some alterations were made as well. To start, the Commission added the provision that a Member State could specify the minimum number of liquid shares for that Member State. The Commission’s position reflected the concern that otherwise shares traded only in smaller markets would not be deemed liquid. Second, the Commission permitted Member States to decide that both the optional criteria (i.e. average daily number of transactions and average daily turnover) would apply (reflecting the aim to support differences across national markets). The Commission’s position (including CESR’s unchanged proposals) was apparent in the final MiFID I text.