17 September 2018

ESMA publishes the responses to its Consultation on proposed amendments to the MiFID II tick size regime

Deutsche Börse Group

Deutsche Börse Group receives positively the recognition from ESMA that the minimum tick size applicable to shares and depositary receipts as per RTS 11 is not well suited for third country instruments where the tick size resulting from the liquidity in the Union disregards the actual liquidity of the instrument outside the Union; this leads to tick sizes which are artificially too wide and increased implicit costs for market participants but also creates a competitive disadvantage compared to venues allowing a smaller tick size. The result is a reduced liquidity for third country instruments traded in the Union, and in the medium to long term, the delisting of those instruments because of lack of activity. This would mean that more than 67% of the listings on Börse Frankfurt are at risk if no appropriate solution is found to adapt the tick size of third country instruments to appropriate levels in the Union.

Moreover, in light of the present matter of tick size regime on trading venues for third country instruments, Deutsche Börse Group would like to reiterate the need to apply the tick size regime consistently and as soon as possible to all possible execution venues. The artificially wide tick sizes for third country instruments also reflects the unlevel playing field within the EU. Systematic Internalisers (SIs) are currently not subject to the tick size regime and can easily and unfairly compete with regulated markets and multi-lateral trading facilities (MTFs) on the basis of – potentially small - price improvements which are not possible on the latter due to set tick sizes. DBG therefore urge regulators and policy makers to ensure that SIs are fully captured by the tick size regime irrespective of the order size and not only required to comply with the tick size regime for orders up to standard market size.

Deutsche Börse Group has reviewed the different options proposed by ESMA and generally considers ESMA’s preferred option d) to be the most appropriate approach to deliver on the regulatory purpose of introducing a consistent, harmonised and efficient tick size regime for non-EU instruments.

Full Deutsche Börse Group response

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World Federation of Exchanges

The consultation paper sets out ESMA’s objectives for amending RTS 11 as enhancing the competitiveness of EU trading venues and promoting orderly trading. WFE believes that the interests of investors in coordinated tick sizes between EU and non-EU venues should also be taken into account. The best means of achieving all three of these objectives would be the adoption in the EU of the tick size in use in the third country in question (approach A), which would address a large proportion third-country instruments.

WFE acknowledges that not all jurisdictions have tick size regimes, however, and recognise ESMA’s interest in accounting for these instruments in its amendments as well. Therefore, it believes that in the case that the third country does not have a tick-size regime, approach D is a pragmatic solution. In coordinating an EU tick size regime in these cases, competent authorities should ensure that their approach does not unduly constrain trading, or result in competitive distortions, either on the EU trading venue or on the third country trading venue.

To achieve such an outcome, WFE recognises that there are several practical challenges concerning option D that would need to be addressed. It understands that EU trading venues within the Federation of European Securities Exchanges (including members shared with the WFE) will in their response to ESMA make practical suggestions to enhance the operability of option D. To the extent that recourse to option D is required, WFE asks that ESMA considers these proposals.

Full World Federation of Exchanges response

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AFME

AFME, CBOE and the London Stock Exchange Group (the Organisations) believe that tick sizes have an important role to play in the financial markets. Appropriately calibrated tick sizes must allow for the efficient formation of prices in comparable mechanisms (to ensure there is an appropriate level of liquidity) whilst seeking to minimise the bid-ask spread (to ensure fairness to end investors). On this basis we believe that changes to the tick size regime must be viewed holistically and so the Organisations are providing consolidated comments on the Investment Firm Review, ESMA Q&A on tick sizes and ESMA Consultation on RTS 11. Our view is that

• trades executed on systematic internalisers (SIs) or trading venues that are above Large in Scale (LIS) or that are non-price forming should not be subject to the tick size regime;

• for all sizes of order, mid-point should remain a valid execution price, permitted to trade at a half tick, both on trading venues and SIs; and

• Competent authorities should ensure that an appropriate tick is applied to third country shares.

Full AFME response

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Euronext

Euronext welcomes the ESMA initiative to amend RTS 11 to account for trading activity of third country instruments outside the Union. It considers that option d) may strike a reasonable balance between the regulatory objectives of harmonising tick sizes for non-EU shares across the EU, avoiding competitive distortions between the EU and third countries, as well as within the EU, and establishing a workable and efficient process. However, it considers that targeted amendments to this option are required to effectively deliver on these objectives.

In our response, Euronext therefore suggests modifications to option d) with regard to:

• the scope of third country instruments,

• data collection, and

• the process for coordination and information between regulators.

In order to maintain a level playing field between EU and non-EU venues, Euronext supports that where the legal headquarter of the issuer is established in or the main pool of liquidity is located in third countries following the EU tick size regime, NCAs and trading venues in the Union should use the liquidity bands applied in these third countries.

Euronext considers that the MiFID II/MiFIR tick size regime will need to be further assessed over time before clear conclusions regarding its impact can be drawn. The impact of the tick size regime is likely to differ between markets and effects should therefore be analysed both at a European and local level.

In light of the present matter of tick size regime on trading venues for third country instruments, Euronext would also like to reiterate the need to apply the tick size regime consistently and as soon as possible to all possible execution venues. The artificially wide tick sizes for third country instruments are not only a case of competitive disadvantage for trading venues in the Union versus non-EU trading venues, but also reflects the unlevelled playing field within the EU.

Systematic internalisers are currently not subject to the tick size regime and can easily unfairly compete with regulated markets and multilateral trading facilities on the basis of price improvements which are not possible on the latter due to large tick sizes. It therefore urges regulators and policy makers to ensure that Systematic internalisers are not only required to comply with the tick size regime for orders up to standard market size, but are fully captured by the tick size regime irrespective of the order size.

Regarding implementation of the tick size regime, Euronext considers that there are several issues that should be addressed. These issues currently prevent the goal of a harmonised tick size regime from being achieved and are outlined in our response.

In respect of the cost-benefit analysis at the end of this consultation, Euronext notes that the numbers provided in respect of the number of third country shares will materially change after Brexit. This is because a number of shares listed on Euronext are also dual-listed in the UK (simultaneous admission to trading on more than one trading venue at the request of the issuer). This is particularly the case on Euronext Dublin, where 47 shares are dual-listed in Ireland and on a venue in the UK. Out of these 47 shares, 11 have their main pool of liquidity in the UK.

Full Euronext response

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Full consultation document

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