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MiFID II tick-size regime

 

 

 

Tick-size requirements in the EU financial market are based on Article 49 of MiFID II and the Commission Delegated Regulation 2017/588 of 14 July 2016 supplementing Directive 2014/65/EU of the European Parliament and of the Council with regard to regulatory technical standards on the tick size regime for shares, depositary receipts and exchange-traded funds (RTS 11).

 

The respective legal framework forces every trading venue to price certain financial instruments in the same increments.

 

Mandatory tick-size framework has been assessed as necessary in view of the perceived risk of an impact of the ever-decreasing tick size on the orderliness of the financial market (Recital 1 of the said Regulation 2017/588 of 14 July 2016).

 

The difference in tick size is very important because it creates a strong pressure on the volume to move to this channel.

 

The study of the French financial market regulator (Mifid II: Impact of the New Tick Size Regime, AMF, March 2018) observed that over the few years, before the MiFID II entry into force, “trading venues have raced to reduce their tick size in order to offer better/tighter prices and win market share. This broad trend has had adverse effects on the overall quality of the market: too small a tick size leads to negligible and incessant price improvements, leading to an increase in order book noise and a deterioration of the price formation process” (p. 2).

 

In the Questions and Answers on MiFID II and MiFIR market structures topics, Tick size regime, updated on 15 November 2017 ESMA underlined that the minimum tick size established under Article 49 of MiFID II and further specified in RTS 11 applies to both orders and quotes.

 

According to the ESMA, this regime is meant to create a level playing field between the different trading venues and the reference to “orders” in Article 2 of RTS 11 should not be interpreted as restricting the application of the tick size regime to only certain types of trading systems but, on the contrary, should be understood in the broadest sense.

 

As the aim of the minimum tick size regime is to ensure the orderly functioning of the market, its application extends to all orders submitted to trading venues.

 

The application of the tick size regime would include, for example, limit orders resting on an order book, orders held in an order management system as well as LIS orders pegged to the mid-point in a lit order book (in practice those LIS orders can only be pegged to the mid-point where the spread consists of an even number of ticks).

 

However, the minimum tick size regime would not apply to transactions executed in systems that match orders on the basis of a reference price as per Article 4(1)(a) of MiFIR, or to negotiated transactions as per Article 4(1)(b) of MiFIR.

 

ESMA, moreover, underlined that trading venues have discretion to set the rules covering the treatment of orders remaining on the book at the moment the minimum tick size increases (including whether or not such orders are to be cancelled or amended), however, trading venues are responsible to disclose those rules appropriately.

 

Trading venues must also observe the requirement to enforce the minimum tick size for orders submitted after that tick size comes into force.

 

 

Asset classes covered

 

 

Article 49 of MiFID II requires trading venues to adopt minimum tick sizes only in relation to equity and certain equity-like instruments.

 

The scope of precisely delineated financial instruments included in the tick-size regime covers shares, depositary receipts and exchange-traded funds.

 

quote

 

Consultation Paper, Amendments to Commission Delegated Regulation (EU) 2017/587 (RTS 1, 09 November 2017, ESMA70-156-275, p. 7

  

 

The tick size regime of Article 49 of MiFID II was introduced in order to harmonise price increments on European trading venues, prevent tick sizes being used as a tool for competition between venues and thereby remove the risk of a “race to the bottom”. 

 

Such a “race to the bottom” has been observed after the introduction of MiFID I where ever smaller tick sizes were used by new competing venues to gain market share. 

 

Such highly granular tick sizes had a very detrimental effect on market depth and on the quality of liquidity (liquidity being scattered over too many price points) forcing European trading venues to voluntarily agree on common tick size tables before the mandatory tick size regime was enshrined in MiFID II. 

 

Other financial instruments are not be subject to the tick size regime, it was considered that the nature of those other instruments and the microstructures of the markets, on which they are traded, cause that the legislative action in that regard is not required.

 

In particular, it follows literally from the Recitals 2 and 3 of the said Regulation 2017/588 of 14 July 2016 that certificates, non-equity financial instruments and fixed income products are free from the MiFID II mandatory tick sizes.

 

 

Personal scope

 

 

According to Article 49(1) MiFID II the respective tick-size regime must be adopted by regulated markets.

 

Moreover, the said Article 49(1) MiFID II is cross-referred in Article 18(5) of MiFID II, which stipulates that also investment firms and market operators operating

 

- Multilateral Trading Facilities (MTFs), and

 

- Organised Trading Facilities (OTFs);

 

must comply and have in place all the necessary effective systems, procedures and arrangements to do so.

 

Such provisions are absent with respect to systematic internaliser (SI), hence this type of trading is not subject to the requirements at issue.

 

However, ESMA reserved on 3 October 2017 (Answer to Question 23 in Questions and Answers on MiFID II and MiFIR market structures topics, ESMA70-872942901-38) that price improvements on quoted prices are only be justified when “they are meaningful and reflect the minimum tick size applicable to the same financial instrument traded on a trading venue”.

 

This is without prejudice to SIs’ ability to quote any price level when dealing in sizes above standard market size.

 

In the ESMA’s opinion “marginal price improvements on quoted prices would challenge the efficient valuation of equity instruments without bringing any real benefits to investors”.

 

Moreover, in the Consultation Paper, Amendments to Commission Delegated Regulation (EU) 2017/587 (RTS 1) of 9 November 2017 (ESMA70-156-275) ESMA proposed to amend Article 10 of RTS 1 to clarify that, for equity instruments subject to the minimum tick size regime under RTS 11, SI quotes would only be considered to reflect the prevailing market conditions where those quotes reflect the price increments applicable to EU trading venues trading the same instruments.

  

Technically, it is proposed to replace Article 10 of the Commission Delegated Regulation (EU) 2017/587 (which determines whether prices quoted by systematic internalisers in accordance with the obligation to make public firm quotes reflect prevailing market conditions) by the following wording:

 

‘The prices published by a systematic internaliser shall reflect prevailing market conditions where they are close in prices to quotes of equivalent sizes for the same financial instrument on the most relevant market in terms of liquidity as determined in accordance with Article 4 for that financial instrument and where the price levels could be traded on a trading venue at the time of publication.’

 

Commenting on this issue, Steven Maijoor, the ESMA’ Chair (ESMA70-156-427 - MiFID II Implementation – Achievements and Current Priorities FESE convention 2018) on 21 June 2018 said:

“SIs appear to be the other type of execution venue enjoying a significant increase in market share under MiFID II. It was one of the objectives of MiFID II to strengthen the SI regime and ensure that investment firms dealing with clients in an organised way are subject to minimum transparency and organisational rules bringing them closer to trading venues.

However, I share your concerns about a lack of a level playing field between SIs and trading venues that may result in changes in the market structure away from trading venues to SIs. We therefore proposed an amendment to the ESMA RTS 1 that deals with the transparency provisions for equity instruments to ensure that quotes of SIs meet the tick size requirements. The draft amendment is with the Commission for endorsement.

I am aware that many of you consider that this amendment does not go far enough since it only covers quotes from SIs that are below the standard market size and you may therefore rather support an amendment of the Level 1 text. I certainly have some sympathy for that approach but a change of Level 1 is not for ESMA to decide. We proposed to amend RTS 1 since there we have the right of initiative and we considered it the most pragmatic way to edge closer to a level playing field between trading venues and SIs in the short- to medium-term.”

 

 

Tick size ranges 

 

 

Annex to the RTS 11 specifies the minimum tick size regime which applies to instruments depending on their liquidity and price level - see the table below.

 

 

 

Tick size table

 

 

Liquidity bands

Price ranges

0 ≤ Average daily number of transactions < 10

10 ≤ Average daily number of transactions < 80

80 ≤ Average daily number of transactions < 600

600 ≤ Average daily number of transactions < 2 000 

2 000 ≤ Average daily number of transactions < 9 000

9 000 ≤ Average daily number of transactions

0 ≤ price < 0,1

0,0005

0,0002

0,0001

0,0001

0,0001

0,0001

0,1 ≤ price < 0,2

0,001

0,0005

0,0002

0,0001

0,0001

0,0001

0,2 ≤ price < 0,5

0,002

0,001

0,0005

0,0002

0,0001

0,0001

0,5 ≤ price < 1

0,005

0,002

0,001

0,0005

0,0002

0,0001

1 ≤ price < 2

0,01

0,005

0,002

0,001

0,0005

0,0002

2 ≤ price < 5

0,02

0,01

0,005

0,002

0,001

0,0005

5 ≤ price < 10

0,05

0,02

0,01

0,005

0,002

0,001

10 ≤ price < 20

0,1

0,05

0,02

0,01

0,005

0,002

20 ≤ price < 50

0,2

0,1

0,05

0,02

0,01

0,005

50 ≤ price < 100

0,5

0,2

0,1

0,05

0,02

0,01

100 ≤ price < 200

1

0,5

0,2

0,1

0,05

0,02

200 ≤ price < 500

2

1

0,5

0,2

0,1

0,05

500 ≤ price < 1 000

5

2

1

0,5

0,2

0,1

1 000 ≤ price < 2 000

10

5

2

1

0,5

0,2

2 000 ≤ price < 5 000

20

10

5

2

1

0,5

5 000 ≤ price < 10 000

50

20

10

5

2

1

10 000 ≤ price < 20 000

100

50

20

10

5

2

20 000 ≤ price < 50 000

200

100

50

20

10

5

50 000 ≤ price

500

200

100

50

20

10

 

 

 

Market impact

 

 

According to the aforementioned study of the French financial market regulator (Mifid II: Impact of the New Tick Size Regime, AMF, March 2018) for French blue chips and mid caps, MiFID II regime has led to an increase in the tick size of 74% of instruments and left the remaining 26% unchanged, whereas for small caps the regime has led to a reduction of 15% of the instruments’ tick sizes, to an increase for 21% and for 64% of them, it left the tick size unchanged.

 

The study (covering more than 500 stocks listed on Euronext Paris over a 2 month time period around the entry into force of MiFID II) revealed, moreover, a sharp increase in depth and a significant reduction in the number of messages sent to the market, at the cost, however, of a widening of the spread for the most liquid securities.

 

The outcome for market participants is a slight additional cost that is offset by the benefits of noise reduction and the increase in the quantity available at the best limits.

 

For small caps, implementing appropriate tick sizes (compared to the constant €0.01 tick previously applicable on these stocks) resulted in a more dynamic order book and, above all, a sharp increase in traded volumes.

 

The AMF concluded that, overall, the tick size regime had a positive outcome for market participants since it led to less noise in the order book and increased the number of securities available at the best limit.

 

This opinion was also shared by Steven Maijoor, ESMA Chair, on 21 June 2018 (ESMA70-156-427).

 

However, he made an important reservation that on the first days of trading under MiFID II and the new mandatory tick size regime, it became evident that the tick size regime, based on liquidity in the EU, does not work properly when applied to shares that have their main pool of liquidity outside of the EU.

 

Because the tick size is based on EU liquidity only, the methodology can result in EU trading venues having to implement larger price increments than non-EU venues trading the same instrument, and thereby face a drop in market share to the benefit of their non-EU counterparts.

 

The ESMA Chair added, moreover, that based on the evidence reported, and beyond the most urgent remedial actions taken by certain trading venues in coordination with their National Competent Authorities, ESMA is considering to propose an amendment to the tick size methodology with a twofold aim:

 

1. addressing the level playing field issue when the most liquid market is outside the EU, and


2. ensuring that a harmonised tick size continues to apply across all EU trading venues for any given instrument.

 

Accordingly, on 13 July 2018 ESMA released Consultation Paper, Amendment to Commission Delegated Regulation (EU) 2017/588 (RTS 11) (ESMA70-156-357).

 

  

 

MiFID II Article 49
Tick sizes

 

1. Member States shall require regulated markets to adopt tick size regimes in shares, depositary receipts, exchange-traded funds, certificates and other similar financial instruments and in any other financial instrument for which regulatory technical standards are developed in accordance with paragraph 4.

 

2. The tick size regimes referred to in paragraph 1 shall:

 

(a) be calibrated to reflect the liquidity profile of the financial instrument in different markets and the average bid-ask spread, taking into account the desirability of enabling reasonably stable prices without unduly constraining further narrowing of spreads;

 

(b) adapt the tick size for each financial instrument appropriately.

 

3. ESMA shall develop draft regulatory technical standards to specify minimum tick sizes or tick size regimes for specific shares, depositary receipts, exchange-traded funds, certificates, and other similar financial instruments where necessary to ensure theorderly functioning of markets, in accordance with the factors in paragraph 2 and the price, spreads and depth of liquidity of the financial instruments.

 

ESMA shall submit those draft regulatory technical standards to the Commission by 3 July 2015.

 

Power is delegated to the Commission to adopt the regulatory technical standards referred to in the first subparagraph in accordancewith Articles 10 to 14 of Regulation (EU) No 1095/2010.

 

4. ESMA may develop draft regulatory technical standards to specify minimum tick sizes or tick size regimes for specific financial instruments other than those listed in paragraph 3 where necessary to ensure the orderly functioning of markets, in accordance withthe factors in paragraph 2 and the price, spreads and depth of liquidity of the financial instruments.

 

ESMA shall submit any such draft regulatory technical standards to the Commission by 3 January 2016.

 

Power is delegated to the Commission to adopt the regulatory technical standards referred to in the first subparagraph in accordance with Articles 10 to 14 of Regulation (EU) No 1095/2010.

 

 

 

 

Questions and Answers on MiFID II and MiFIR market structures topics

 

The tick size regime

 

Question 1 [Last update: 18/11/2016]

 

Which National Competent Authority (NCA) should be responsible for calculating and publishing the average daily number of transactions (ADNT) and in particular in the case of multi-listed instruments?

 

Answer 1

 

The relevant NCA responsible calculating and publishing the ADNT should be the competent authority identified as the NCA of most relevant market in terms for the purposes of transaction reporting. In the case of multi-listed instruments, the criteria and procedure to be used for determining which NCA should be the relevant NCA are specified under Article 16 of RTS 22 (Commission Delegated Regulation (EU) 2017/590 of 28 July 2016 supplementing Regulation (EU) No 600/2014 of the European Parliament and of the Council with regard to regulatory technical standards for the reporting of transactions to competent authorities).

 

For new instruments, Article 16 of RTS 22 clarifies that the most relevant market for the financial instrument is the market of the Member State in which a request for admission to trading was first made or where the instrument was first traded. The NCA of this Member State will be responsible for publishing the estimates and preliminary calculations as per the procedure set out under Article 3(5) and (6) of RTS 11 (Commission Delegated Regulation (EU) 2017/588 of 14 July 2016 supplementing Directive 2014/65/EU of the European Parliament and of the Council with regard to regulatory technical standards on the tick size regime for shares, depositary receipts and exchange-traded funds).

 

Where the relevant NCA has concluded an agreement with ESMA, the ADNT will be published centrally on the ESMA website. For other NCAs, the ADNT will be published on the ESMA website on a best-effort basis.

 

Question 2 [Last update: 18/11/2016]

 

Which types of corporate actions for an instrument may trigger a recalculation of ADNT?

 

Answer 2

 

Any corporate actions that the relevant NCA anticipates will lead to a material change in the average daily number of trades after the event may initiate the recalculation process per Article 4 of RTS 11. Normally such a circumstance may arise when the issuer plans to undertake, amongst other things, share buybacks or share issuance which will result in the instrument continuing to trade in a liquidity band that would not be optimal unless a recalculation is undertaken.

 

Question 3 [Last update: 18/11/2016]

 

Are non-EU instruments in scope and how the calculation of ADNT should be performed for those instruments?

 

Answer 3

 

Non-EU instruments are included in the scope of the Article 49 regime as soon as they are traded on a trading venue in the Union. The applicable liquidity band is determined by the relevant NCA taking into account the ADNT on the most relevant market in terms of liquidity according to Article 4 of RTS 1. Trading activity taking place outside of the Union should not be considered for these purposes.

 

Question 4 [Last update: 18/11/2016]

 

How is a liquidity band applied for instruments trading in different currencies across trading venues?

 

Answer 4

 

Once a particular liquidity band is assigned to an instrument, trading of that instrument will continue within that band until another liquidity band is assigned as a result of periodical or ad hoc review by the relevant NCA or ESMA. As set out in Recital 8 of RTS 11, the same liquidity band will be applied irrespective of the currency denomination used for the quotation of the financial instrument.

 

Question 5 [Last update: 18/11/2016]

 

Can a trading venue or NCA manually intervene to allow a smaller tick size if it can be shown that the mandated minimum tick size is adversely impacting liquidity? Answer 5 No, except where there has been a corporate action event in which the NCA concerned will consider assigning a different liquidity band according to its estimate of the ADNT occurring in the most liquid venue following the said corporate action event.

 

Question 6 [Last update: 19/12/2016] - outdated

 

Does the minimum tick size regime under Article 49 of MiFID II apply to all orders for which a pre-trade transparency waiver can be granted in accordance with Article 4 of MiFIR?

 

Answer 6

 

Article 49 of MiFID II requires trading venues to adopt minimum tick sizes in relation to equity and certain equity-like instruments. RTS 11 specifies the minimum tick size regime which applies to those instruments depending on their liquidity and price level. As the aim of the minimum tick size regime is to ensure the orderly functioning of the market, its application extends to all orders submitted to trading venues. The application of the tick size regime would include, for example, limit orders resting on an order book, including orders held in an order management system as per Article 4(1)(d) of MiFIR.

 

However, since the tick size regime applies to orders and not to the execution price of transactions, it is therefore possible for a transaction to take place at a price between two ticks. This is the case if this price is derived from other prices that otherwise comply with the minimum tick size. For example, the minimum tick size regime would not apply to transactions executed in systems that match orders on the basis of a reference price as per Article 4(1)(a) of MiFIR, or to negotiated transactions as per Article 4(1)(b) of MiFIR.

 

Question 6 [Last update: 18/12/2017]

 

Does the minimum tick size regime under Article 49 of MiFID II apply to all orders for which a pre-trade transparency waiver can be granted in accordance with Article 4 of MiFIR?

 

Answer 6

 

Article 49 of MiFID II requires trading venues to adopt minimum tick sizes in relation to equity and certain equity-like instruments.

 

RTS 11 specifies the minimum tick size regime which applies to those instruments depending on their liquidity and price level.

 

As the aim of the minimum tick size regime is to ensure the orderly functioning of the market, its application extends to all orders submitted to trading venues.

 

The application of the tick size regime would include, for example, limit orders resting on an order book, orders held in an order management system as well as LIS orders pegged to the mid-point in a lit order book (in practice those LIS orders can only be pegged to the mid-point where the spread consists of an even number of ticks).

 

However, the minimum tick size regime would not apply to transactions executed in systems that match orders on the basis of a reference price as per Article 4(1)(a) of MiFIR, or to negotiated transactions as per Article 4(1)(b) of MiFIR.

 

Question 7 [Last update: 19/12/2016]

 

What happens to orders remaining on the order book at the moment the tick size increases?

 

Answer 7

 

Trading venues have discretion to set the rules covering the treatment of orders remaining on the book at the moment the minimum tick size increases, including whether or not such orders are to be cancelled or amended. Trading venues are responsible to disclose those rules appropriately. Trading venues must also observe the requirement to enforce the minimum tick size for orders submitted after that tick size comes into force.

 

Question 8 [Last update: 03/10/2017] - outdated

 

If the estimated ADNT for a new instrument is not available on the first day of trading, which liquidity band should trading venues apply until the estimated ADNT is published by NCA or ESMA? When can the trading venue proceed to adopt such a liquidity band?

 

Answer 8

 

In the event of the estimated ADNT not being published by the NCA or, where applicable ESMA, all relevant trading venues would need to apply a harmonised default tick size pending such a publication to ensure a uniform tick size regime across the Union. For an instrument that is being admitted to trading or traded for the first time in the EU, where the applicable estimated ADNT remains unavailable on the first day of trading, trading venues should assign the highest liquidity band (i.e. liquidity band for instrument with an ADNT ≥ 9,000) to the instrument in question for the purpose of the tick size regime. This default regime should apply until the actual publication of the estimated ADNT by ESMA or by the relevant NCAs. Estimated ADNTs published should apply the day after their publication.

 

Question 8 [Last update: 28/03/2018]

 

If the ADNT for an instrument is not available, which liquidity band should trading venues apply until the ADNT is published by NCA or ESMA? When can the trading venue proceed to adopt such a liquidity band?

 

Answer 8

 

In the event of the ADNT not being published by ESMA or, where applicable the NCA, all relevant trading venues would need to apply a harmonised default tick size pending such a publication to ensure a uniform tick size regime across the Union.

 

For an instrument that is admitted to trading or traded in the EU, where the applicable ADNT remains unavailable, trading venues should assign the highest liquidity band (i.e. liquidity band for instrument with an ADNT ≥ 9,000) to the instrument in question for the purpose of the tick size regime. This default regime should apply until the actual publication of the ADNT by ESMA or by the relevant NCAs. ADNTs published should apply the day after their publication.

 

Question 9 [Last update: 03/10/2017]

 

In case of a simultaneous dual listing, shall an NCA be appointed for the purpose of determining the estimated average daily number of shares and establishing the applicable tick size?

 

Answer 9

 

Yes, the ESMA website will always display one NCA as the NCA of the most relevant market in terms of liquidity as per Article 26 of MiFIR.

 

Question 10 [Last update: 15/11/2017]

 

Does the mandatory tick size regime apply to both orders and quotes?

 

Answer 10

 

Yes, the minimum tick size established under Article 49 of MiFID II and further specified in RTS 11 should apply to both orders and quotes. This regime is meant to create a level playing field between the different trading venues and the reference to “orders” in Article 2 of RTS 11 should not be interpreted as restricting the application of the tick size regime to only certain types of trading systems but, on the contrary, should be understood in the broadest sense.

 

 

 

 

 

 

 

 

IMG 0744

    Documentation    

 

 

 

 

MiFID II, Article 49

 

Commission Delegated Regulation (EU) 2017/588 of 14 July 2016 supplementing Directive 2014/65/EU of the European Parliament and of the Council with regard to regulatory technical standards on the tick size regime for shares, depositary receipts and exchange-traded funds (RTS 11)

 

Questions and Answers on MiFID II and MiFIR market structures topics, ESMA70-872942901-38

 

Mifid II: Impact of the New Tick Size Regime, AMF, March 2018

 

 

 

 

 

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    Links    

 

 

 

 

 

Bloomberg, MiFID II may triple dark trading in Europe as new venues soar

 

 

 

 

 

 

 

 

 

Last Updated on Saturday, 21 July 2018 18:54
 

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