4.II.2.4.3.2 Level 2 text: defining large in scale-orders

The MiFID I Directive required the concept of ‘large in scale’ to be specified through Level 2 measures. CESR assisted the Commission in drafting the Level 2 rules. CESR needed to decide what would constitute a ‘large in scale’ order. Challenging questions needed to be answered, such as (a) whether to use a principle- or rule-based approach, (b) whether the concept needed to be based on trading levels on a national or EEA level, and/or (c) what calculation methodologies needed to be used.1

In terms of point (a), CESR concluded that a principle-based approach would not create the harmonisation and legal certainty deemed necessary under MiFID I. In CESR’s view, a rule-based approach was a better option.2 CESR then explored the options for specifying the rule-based approach (point b). Initially, CESR favoured a single threshold for four groups of shares, banded by average daily turnover (ADT). Most respondents favoured CESR’s proposal. That being said, several respondents expressed a preference for an individual share approach, given its accuracy for the liquidity of the individual share.3 CESR subsequently proposed a compromise. CESR maintained its initial proposal, but made a number of changes to the MiFID I-table to make it more sensitive to less liquid shares (i.e. five share categories were provided, instead of four).4 In case the share order would fall in one of the five groups, the order would be ‘large in scale’.5 CESR added that a large in scale waiver would not be required for quote driven-systems with designated market makers, given that the RM or MTF required the market maker(s) to maintain quotations in a size that ‘balanced between the needs of participants to deal in a commercial size and the risk to which the market maker exposed itself’.6 In other words, CESR believed that market makers in quote-driven markets were already sufficiently protected. Hence, CESR proposed no large in scale-waiver was deemed necessary for quote-driven markets.

The Commission overall adopted CESR’s recommendations. This was evident in the final MiFID I text. MiFID I used a rule-based approach for the large in scale waiver. Five groups of shares were in place, banded by average daily turnovers and a related order size. In case the order size fell within one of the groups, the large in scale waiver could be used. The concept of a large in scale was determined on the European level (not: national). The Commission ‘overall’ adopted CESR’s recommendations, since one change was made. The Commission enabled also market markers on quote-driven markets to use the large in scale-waiver. The latter is evident in the final MiFID I text. MiFID I made no distinction between the trading model involved and the use of the large in scale-waiver.7 The final text of MiFID I reflected the aim of (1) sufficient protection for market makers in quote-driven markets (liquidity provision) and (2) simplicity in terms of the waivers being available for all trading systems.