ESMA70-872942901-38 — Q&A on MiFID II and MiFIR market structures topics
Q&A on MiFID II and MiFIR market structures topics
Authority
ESMA
Reference
ESMA70-872942901-38
Legal basis
MiFID II and MiFIR (market structures)
Status
In force
Published
13 October 2023
Source
Documents
Questions and Answers On MiFID II and MiFIR market structure topics
Please note that this document is not updated after 31 December 2023. For Q&As issued from 1 January 2024, please search in the ESMA Q&A IT-tool.
Table of questions................................................................................................................7
Table of questions................................................................................................................7
Table of questions................................................................................................................7
1
Introduction.................................................................................................................14
Introduction.................................................................................................................14
2
Data disaggregation [Last update: 18/11/2016]...........................................................16
Data disaggregation [Last update: 18/11/2016]...........................................................16
3
Direct Electronic Access (DEA) and algorithmic trading [Last update: 23/09/2022] .....18
Direct Electronic Access (DEA) and algorithmic trading [Last update: 23/09/2022] .....18
4
The tick size regime [Last update: 06/04/2021]...........................................................36
The tick size regime [Last update: 06/04/2021]...........................................................36
5
Multilateral and bilateral systems [Last update: 16/12/2022] .......................................40
Multilateral and bilateral systems [Last update: 16/12/2022] .......................................40
5.1
5.1
General................................................................................................................40
5.2
5.2
Organised Trading Facilities (OTFs) ....................................................................47
5.3
5.3
Systematic internalisers .......................................................................................58
6
Access to CCPs and trading venues [Last update: 13/10/2023 New] .......................66
Access to CCPs and trading venues [Last update: 13/10/2023 New] .......................66
7
Application of MiFID II after 3 January 2018, including issues of 'late transposition' [Last update: 18/12/2017]...........................................................................................................69
Application of MiFID II after 3 January 2018, including issues of 'late transposition' [Last update: 18/12/2017]...........................................................................................................69
Acronyms and definitions used
ADNT
Average Daily Number of Transactions
Full table: see document.
RTS 11
Commission Delegated Regulation (EU) 2017/588 on the tick size regime for shares, depositary receipts and exchange-traded funds
RTS 14
Commission Delegated Regulation (EU) 2017/572 on the specification of the offering of pre-and post-trade data and the level of disaggregation of data
RTS 15
Commission Delegated Regulation (EU) 2017/581 on clearing access in respect of trading venues and central counterparties
RTS 22
Commission Delegated Regulation (EU) 2017/590 on the reporting of transactions to competent authorities
RTS 24
Commission Delegated Regulation (EU) 2017/580 on the maintenance of relevant data relating to orders in financial instruments
RTS 25
Commission Delegated Regulation (EU) 2017/574 on the level of accuracy of business clocks
RTS 26
Commission Delegated Regulation (EU) 2017/582 specifying the obligation to clear derivatives traded on regulated markets and timing of acceptance for clearing
SI
Systematic internaliser
STOR
Suspicious Transaction or Order Report
Table of questions
Data disaggregation
1
Level at which disaggregation is required
Article 12 of MiFIR and RTS 14
18/11/2016
Data disaggregation
2
Requests for disaggregated data
RTS 14
18/11/2016
Data disaggregation
3
Country of issue
RTS 14
18/11/2016
1
Treatment of simple algorithms
Article 18 of the Commission Delegated Regulation (EU) 2017/565
19/12/2016
2
Transmission of orders and algorithmic trading
Article 18 of the Commission Delegated Regulation (EU) 2017/565
19/12/2016
3
Automated Order Router (AOR)
Article 18 of the Commission Delegated Regulation (EU) 2017/565
19/12/2016
Electronic Access (DEA) and algorithmic
4
Reference to 'market markers' under Article 2(1)(d) of MiFID II
Article 2(1)(d) of MiFID II
31/01/2017
Electronic Access (DEA) and algorithmic
5
Identification and authorisation of HFT
Article 19 of the Commission Delegated Regulation (EU) 2017/565 and Article 2(1)(d) of MiFID II
03/04/2017
Electronic Access (DEA) and algorithmic
7
DEA users and HFT
Article 19 of the Commission Delegated Regulation (EU) 2017/565
03/04/2017
Electronic Access (DEA) and algorithmic
8
Identification of algorithmic trading activities
Article 18 of the Commission Delegated Regulation (EU)
03/04/2017
9
Algorithmic trading and OTC activities
Article 17 of MiFID II
03/04/2017
10
Reconciliation of logs
Article 17(3) of RTS 6
03/04/2017
11
Storage of order and transaction data
Article 13(7) of RTS 6
03/04/2017
12
Definition of DEA
Article 20 of Commission Delegated Regulation (EU) 2017/565
03/04/2017
13
Meaning of 'continuous assessment and monitoring of market and credit risk' in Article 17(2) of RTS 6
Article 17(2) of RTS 6
31/05/2017
14
Record-keeping obligations for HFTs
Article 17(2) of MiFID II
07/07/2017
15
Position limits set by clearing members to algorithmic traders
Article 2(2) of RTS 26
07/07/2017
16
Exemption for clearing members from certain pre-trade checks
Article 26 of RTS 6
07/07/2017
17
Kill functionality
Article 12 of RTS 6
07/07/2017
18
Flagging of market making strategies
Article 3(2)(a) of RTS 24
07/07/2017
19
OTRs for different types of market participants
RTS 9
07/07/2017
20
Maximum OTR in the absence of transactions
RTS 9
07/07/2017
21
Maximum bid-ask ranges for market making strategies
Article 1 of RTS 8
07/07/2017
22
Ability of a trading venue to cancel, vary or correct a transaction
Article 18 of RTS 7
07/07/2017
23
DEA provider's controls and suitability checks
Article 17(5) of MiFID II, Articles 19- 23 of RTS 6 and Article 22 of RTS 7
28/03/2018
25
Authorisation of DEA providers
Article 48(7) MiFID II
of
15/11/2017
26
Market Making and incentives to be provided during stressed market conditions
Article 6 of RTS
8
04/10/2018
27
Bulk quotes in the context of RTS 9 on OTR
RTS 9
04/10/2018
28
Scope of Article 17(6) of MiFID II and Chapter IV (Articles 24- 27) of RTS 6
Article 17(6) MiFID II Chapter IV (Articles 24-27) of RTS 6
of and
04/10/2018
29
Concept of comparable size and voluntary provision of liquidity
Article 2(1)(b) RTS 8
of
14/11/2018
30
Identification of HFT
Article 19 of Commission Delegated Regulation (EU) 2017/565
01/02/2019
31
Member preferencing and pre- arranged transactions
Article 3 and 4(1)(b) of MiFIR
05/12/2019
32
Classification of DEA trades
Article 4(1)(41) of MiFID II
03/02/2021
33
Algorithmic trading and automated order managing
Article 4(1)(39) MiFID II
of
15/07/2022
34
Compliance with algorithmic trading requirements
Article 17 of MiFID
II
15/07/2022
35
Trading hours
Article 17 of MiFID II
23/09/2022
Tick size
1
Relevant National Competent Authority (NCA) responsible for calculating and publishing the average daily number of transactions (ADNT)
RTS 11
18/11/2016
regime
2
Corporate actions
RTS 11
18/11/2016
regime
4
Application of the tick size for instruments trading in different currencies
RTS 11
18/11/2016
6
Tick size regime and pre-trade transparency waivers
RTS 11
06/04/2021
7
Orders remaining on the order book at the moment the tick size increases
RTS 11
19/12/2016
8
Default regime for tick sizes
RTS 11
28/03/2018
9
Responsible competent authority in case of dual listing
RTS 11
03/10/2017
10
Scope of the tick size regime
RTS 11
15/11/2017
11
Application of tick size regime to periodic auction systems
RTS 11
02/10/2019
1
Can an MTF operator be a member/participant of its own MTF
Article 19 of MiFID II
31/01/2017
2
Compliance with co-location provisions under RTS 10 in case of outsourced co-location service
RTS 10
31/01/2017
3
Non-discriminatory access to trading venues
Articles 18(3) & 53(1) of MiFID II
07/07/2017
4
Member or participant of a regulated market or an MTF
Article 53(3) of MiFID II
07/07/2017
Multilateral & bilateral systems
5
Client relationship between two counterparties that trade on a trading venue
Articles 19(4) and 53(4) of MiFID II
15/11/2017
Multilateral & bilateral systems
6
Transparency of fee structures
Article 4 of RTS 10
28/03/2018
Multilateral & bilateral systems
7
Arranging transactions that are ultimately formalised on another trading venue
Article 4(1)(21), (22) and (23) of MiFID II
04/10/2018
Multilateral & bilateral systems
8
Registration of a segment of an MTF as an SME growth market
Article 33 of MiFID II and Articles 7 and 78 of the Commission Delegated Regulation 2017/565
04/10/2018
Multilateral & bilateral systems
9
Maker Taker schemes
Article 48(9) of MiFID II
04/10/2018
9b
Authorisation of multilateral systems facilitating the execution of repurchase agreement (repo) transactions
Article 5 of MiFID II
29/05/2020
10
Characteristics of OTFs
Article 4(1)(23) of MiFID II
03/04/2017
11
OTFs and voice trading
Article 4(1)(23) of MiFID II
03/04/2017
12
Distinction between OTFs and MTFs
Articles 4(1)(22) &(23), 19 and 20 of MiFID II
03/04/2017
13
Allowed activities for OTFs: concept of liquid sovereign debt
Article 20(3) of MiFID II
03/04/2017
14
Allowed activities for OTFs: carrying out market making on an independent basis
Article 20(5) of MiFID II
03/04/2017
15
Operation of an OTF and a SI
Article 20(4) of MiFID II
03/04/2017
16
Operation of an OTF and a SI
Article 20(4) of MiFID II
03/04/2017
17
Connexion of an OTF to other liquidity pools
Article 20(4) of MiFID II
03/04/2017
18
Operation of an OTF and best execution
Article 20(8) of MiFID II
03/04/2017
19
Exercise of discretion
Article 20(6) of MiFID II
03/04/2017
20
Exercise of discretion
Article 20(6) of MiFID II
03/04/2017
21
Exercise of discretion
Article 20(6) of MiFID II
03/04/2017
22
OTF mandatory trading in financial instruments
Article 4(1)(23) of MiFID II
03/10/2017
23
Provisions applicable to OTFs trading REMIT wholesale energy products
Article 15 of MiFID II and ITS 19
03/10/2017
24
OTF best execution obligations vis-à-vis third-party brokers
Article 27 of MiFID II
03/10/2017
26
SI and matched principal trading
Commission Delegated Regulation (EU) 2017/565
03/04/2017
27
Providing matched principal trading on an occasional basis
Commission Delegated Regulation (EU) 2017/565
03/04/2017
28
Provision of quote streaming and order execution to multiple SIs
Article 1(7) of MiFID II
07/07/2017
29
Equity SIs and pre-trade transparency obligations
Article 15(2) of MiFIR
03/10/2017
30
Branches of third country firms operating as SI in the EU
Article 41 of MiFID II
02/04/2019
31
Branches of third country firms operating as SI in the EU
Article 41 of MiFID II
02/04/2019
32
Matched Principal Trading by investment firms
Commission Delegated Regulation (EU) 2017/565
03/02/2021
33
Single liquidity provider and SI operation
Article 4(1)(20) of MiFID II and Article 23 of MiFID II
16/12/2022
1
Timing of notification for transitional arrangements under Article 35(5) of MiFIR
Article 35(5) of MiFIR
07/07/2017
2
Access to CCPs: open offer vs. novation
RTS 15
07/07/2017
Access to CCPs and trading venues
3
Timing and procedure of notification for temporary opt- out under Article 36(5) MiFIR
Articles 36(5) of MiFIR
12/09/2017
Access to CCPs and trading venues
4
Exemptions under Article 36(5) and Article 54(2) of MiFIR
Articles 36(5) and 54(2) of MiFIR
12/09/2017
Access to CCPs and trading venues
5
Timing of application for transitional arrangements under Article 54(2) of MiFIR
Article 54(2) MiFIR
of 12/09/2017
Table
Column 1
6
Limitation of access rights following exemption under Article 36(5) of MiFIR
Article 36(5) of MiFIR
12/09/2017
Full table: see document.
1 Introduction
Background
The final legislative texts of Directive 2014/65/EU (MiFID II) and Regulation (EU) No 600/2014 (MiFIR) were approved by the European Parliament on 15 April 201 and by the European Council on 13 May 201. The two texts were published in the Official Journal on 12 June 201 and entered into force on the twentieth day following this publication - i.e. 2 July 201.
Many of the obligations under MiFID II and MiFIR were further specified in the Commission Delegated Directive and two Commission Delegated Regulations 4, as well as regulatory and implementing technical standards developed by the European Securities and Markets Authority (ESMA).
MiFID II and MiFIR, together with the Commission delegated acts as well as regulatory and implementing technical standards will be applicable from 3 January 2018.
Purpose
The purpose of this document is to promote common supervisory approaches and practices in the application of MiFID II and MiFIR in relation to market structures topics. It provides responses to questions posed by the general public, market participants and competent authorities in relation to the practical application of MiFID II and MiFIR.
The content of this document is aimed at competent authorities and firms by providing clarity on the application of the MiFID II and MiFIR requirements.
The content of this document is not exhaustive and it does not constitute new policy.
Status
The question and answer (Q&A) mechanism is a practical convergence tool used to promote common supervisory approaches and practices under Article 29(2) of the ESMA Regulation.
Due to the nature of Q&As, formal consultation on the draft answers is considered unnecessary. However, even if Q&As are not formally consulted on, ESMA may check them with representatives of ESMA's Securities and Markets Stakeholder Group, the relevant Standing Committees' Consultative Working Group or, where specific expertise is needed, with other external parties.
ESMA will periodically review these Q&As on a regular basis to update them where required and to identify if, in a certain area, there is a need to convert some of the material into ESMA Guidelines and recommendations. In such cases, the procedures foreseen under Article 16 of the ESMA Regulation will be followed.
The Q&As in this document cover only activities of EU investment firms in the EU, unless specifically mentioned otherwise. Third country related issues, and in particular the treatment of non-EU branches of EU investment firms, will be addressed in a dedicated third country section.
Questions and answers
This document is intended to be continually edited and updated as and when new questions are received. The date on which each section was last amended is included for ease of reference.
2 Data disaggregation [Last update: 18/11/2016]
Question 1 [Last update: 18/11/2016]
Will disaggregation be required at the level of the market operator or at the level of each trading venue?
Answer 1
Disaggregation is required at the level of each trading venue for which the market operator or investment firm operating a trading venue has received a specific authorisation under MiFID II.
Question 2 [Last update: 18/11/2016]
Article 1 of RTS 14 7 states that market operators and investment firms operating a trading venue shall provide disaggregated data 'on request'. Who would be entitled to make such requests? What constitutes a request in this context? How quickly do market operators and investment firms operating a trading venue need to respond to a request for unbundled data?
Answer 2
MiFIR requires the relevant data to be made available 'to the public' in disaggregated form on reasonable commercial terms. As such, any individual or entity (whether or not a user of the trading venue) could make a request for disaggregated data and the market operator or investment firm operating a trading venue has to provide the commercial terms to acquire the disaggregated data.
As part of those commercial terms and to effectively provide access to the arrangements employed for making public the information referred to in Articles 3, 4 and 6 to 11 of MiFIR, the market operator or investment firm operating a trading venue may impose non-discriminatory technical requirements on clients.
The request for disaggregated data could be in any format provided it clearly expresses a request for the disaggregated data. For the avoidance of doubt, market operators and investment firms operating a trading venue do not need to make disaggregated data available unless they have received a request to do so.
Market operators and investment firms operating a trading venue should respond to requests for disaggregated data as quickly as practicable. The response should not be slower than to a request for non-disaggregated data. Market operators and investment firms operating a trading venue should reply to requests falling in the same category within the same time frame.
Question 3 [Last update: 18/11/2016]
Article 1(1)(b) of RTS 14 requires disaggregation by country of issue for shares. How should 'country of issue' be interpreted? Is this also required for non-EU countries?
Answer 3
Country of issue should be interpreted as the home Member State of the issuer, as defined in Article 2(1)(i) of the Transparency Directive, including where the issuer is incorporated in a third country.
3 Direct Electronic Access (DEA) and algorithmic trading [Last update: 23/09/2022]
Question 1 [Last update: 19/12/2016]
Does a simple algorithm qualify as algorithmic trading?
Answer 1
Yes. The fact that a person or firm undertakes trading activity by means of an algorithm which includes a small number of processes (e.g. makes quotes that replicate the prices made by a trading venue) does not disqualify the firm running such algorithm from being engaged in algorithmic trading.
Question 2 [Last update: 19/12/2016]
If an investment firm (firm A) merely transmits a client's order for execution to another investment firm (firm B) who uses algorithmic trading, is investment firm A engaged in algorithmic trading?
Answer 2
No. The transmission of an order for execution to another investment firm without performing any algorithmic trading activity is not algorithmic trading.
Question 3 [Last update: 19/12/2016]
Can a functionality be considered as an Automated Order Router (AOR) if it submits the same order to several trading venues? Would that qualify as algorithmic trading?
Answer 3
According to Recital 22 of Commission Delegated Regulation (EU) 2017/565, an AOR is characterized by only determining the trading venue or trading venues to which the order has to be sent without changing any other parameter of the order (including modifying the size of the order by 'slicing' it into 'child' orders). In case the same unmodified order is sent to several trading venues to ensure execution and it is executed in one of these venues, the functionality can also cancel the unexecuted orders in the other venues without qualifying as algorithmic trading.
Question 4 [Last update: 31/01/2017]
Do the references to 'market makers' in MiFID II Article 2(1)(d)(i) and Article 2(1)(j) cover those market makers as defined under MiFID II Article 4(1)(7) or those firms engaged in a market making agreement according to Article 17(4) of MiFID II?
Answer 4
The reference to market makers' in MiFID II Article 2(1)(d)(i) and Article 2(1)(j) covers both firms engaged in a market making agreement according to Article 17(4) of MiFID II and other market makers covered by Article 4(1)(7) of MiFID II.
Question 5 [Last update: 03/04/2017]
How should the identification and authorisation take place for those firms applying a HighFrequency Trading (HFT) technique?
Answer 5
The mechanics of identifying whether a firm is deemed to be applying a HFT technique are detailed in Article 19 of Commission Delegated Regulation (EU) 2017/565. Firms should review their trading activities at least on a monthly basis to self-assess whether an authorisation requirement has been triggered over the course of the period in question. Upon request, trading venues must provide their members, participants or clients with an estimate of the average number of messages per second two weeks after the end of each calendar month. For this purpose, trading venues should only include messages generated by algorithmic trading activity as identified by the member, participant or client.
However, the onus remains on firms to ensure that the estimates provided by the trading venues accurately reflect their actual trading activity (and in particular that it only takes into account proprietary algorithmic trading activity on liquid instruments excluding, in the case of DEA providers, messages sent by DEA clients using the firm's code).
Where a firm engages in HFT (as described above) and is not authorised as an investment firm under MiFID II, the firm is required to immediately seek authorisation as required under Article 2(1)(d)(iii) of MiFID II.
ESMA reminds that any firm engaged in algorithmic trading (including HFT) has to notify this circumstance to the national competent authority of its home Member State and to the national competent authorities of the trading venues at which it engages in algorithmic trading as member or participant.
Question 6 [Last update: 03/04/2017]
Can DEA users be identified as applying a HFT technique?
Answer 6
Yes. As clarified under Recital 20 of Commission Delegated Regulation (EU) 2017/565, DEA users may be classified as HFTs if they meet the conditions set out under Article 4(1)(40) of MiFID II and Article 19 Commission Delegated Regulation (EU) 2017/565.
In order to assess whether a DEA user meets the applicable message thresholds, firms accessing trading venues through DEA may contact their DEA provider which is obliged to record the data relating to the orders submitted, including modifications and cancellations under Article 21(5) of RTS 6.
However, the onus remains on investment firms to ensure that the estimates provided by the DEA providers accurately reflect their actual trading activity (and in particular that it only takes into account proprietary trading activity on liquid instruments excluding, in the case of DEA users sub-delegating the DEA provider's code, messages sent by their own DEA clients).
Question 7 [Last update: 03/04/2017]
When would an investment firm using only algorithms which draw human traders' attention to trading opportunities qualify as engaged in algorithmic trading?
Answer 7
The use of algorithms which only serve to inform a trader of a particular investment opportunity is not considered as algorithmic trading, provided that the execution is not algorithmic.
Question 8 [Last update: 03/04/2017]
Does the MiFID II obligation relating to algorithmic trading apply to electronic OTC trading? Are algorithms that provide quotes/orders to customers subject to the requirements set out in MiFID II?
Answer 8
Article 17 of MiFID II covers the trading activity that takes place on a trading venue. Therefore, OTC trading activity, such as the generation of quotes sent bilaterally to clients is not covered by the provisions in Article 17 of MiFID II (and any further requirements thereof).
Question 9 [Last update: 03/04/2017]
Please explain what is meant by Article 17(3) of RTS 6 which requires investment firms to 'reconcile' their own electronic logs with information about their outstanding orders and risk exposures as provided by the trading venues to which they send orders, their brokers or DEA providers, their clearing members or CCP, their data providers or other relevant business partners?
Answer 9
The goal of post-trade controls is mainly to enable firms engaged in algorithmic trading to undertake appropriate management of their market and credit risk. To that end, and in order to make sure that post-trade controls are based on reliable information, Article 17(3) of RTS 6 requires investment firms to reconcile their own electronic logs with information about their outstanding orders and risk exposures as provided by external parties. This should be understood as an obligation to compare the trading activity's reports generated by the investment firm itself with reports from other external sources. This should contribute in particular to:
a) Early detection of any discrepancy between the different data sources and mitigation of errors and malfunctions;
b) Accurate calculation of the firm's actual exposure (in particular, where it accesses different multiple trading systems and/or brokers) and the timely generation of adequate alerts before the position and loss limits set out by the firm have been breached.
Question 10 [Last update: 03/04/2017]
Are firms required to store market data in order to fulfil the requirements contained in Article 13(7) of RTS 6 regarding the replay functionality of surveillance systems?
Answer 10
Under Article 13(1) of RTS 6, investment firms engaged in algorithmic trading are obliged to have in place monitoring systems capable of generating operable alerts to indicate potential market abuse. To that end, firms have to take into account not only their own message, order flow and transaction records but also information from other sources (trading venues, brokers, clearing members, CCPs, data providers, relevant business partners and so forth) which constitute not only the input used to generate messages but also the context of the trading activity.
Under Article 13 of RTS 6 there is no obligation to store internally all the information from other sources as long as it is possible to retrieve that information to operate the replay function.
Those operable alerts may lead to the submission to the national competent authority of a Suspicious Transaction or Order Report (STOR) under the Market Abuse Regulation (MAR). In particular, Article 5(3) of Commission Delegated Regulation (EU) 2016/957 12 prescribes that the information submitted as part of a STOR has to be based on facts and analysis, taking into account all information available to them. Additionally, there is an obligation to maintain for a period of five years the information documenting the analysis carried out with regard to orders and transactions that could constitute market abuse which have been examined and the reasons for submitting or not submitting a STOR. That information shall be provided to the competent authority upon request (Article 3(8) of Commission Delegated Regulation (EU) 2016/957).
Question 11 [Last update: 03/04/2017]
Article 20 of Commission Delegated Regulation (EU) 2017/565 further clarifies the definition of direct electronic access as per Article 4(1)(41) of MiFID II by stating that persons shall be considered not capable of electronically transmitting orders relating to a financial instrument directly to a trading venue in accordance with Article 4(1)(41) of MiFID II where that person cannot exercise discretion regarding the exact fraction of a second of order entry and the lifetime of the order within that timeframe. What does 'exercise discretion regarding the exact fraction of a second' mean?
Answer 11
One of the benefits of accessing a trading venue by DEA is in the ability of the firm submitting the order to exercise greater control over the timing of order submission. The use of DEA without passing through appropriate control filters of the provider of DEA and those of the trading venue, is not permitted under MiFID II. Such filters add minimal, but a finite amount of delay to the order reaching the matching engine of the trading venue and as such some may preclude the possibility of a firm submitting such an order to exercise discretion regarding the exact fraction of a second.
However, the phrase in question should be construed as whether the DEA user in question is able to exercise discretion regarding the exact fraction of a second in sending an order, not the exact timing of an order reaching the matching engine. This is a natural interpretation given that current network routing technology cannot provide certainty for a message to reach its destination with the precision of 'exact fraction of a second'.
12 Commission Delegated Regulation (EU) 2016/957 of 9 March 2016 supplementing Regulation (EU) No 596/2014 of the European Parliament and of the Council with regard to regulatory technical standards for the appropriate arrangements, systems and procedures as well as notification templates to be used for preventing, detecting and reporting abusive practices or suspicious orders or transactions (OJ L 160, 17.6.2016, p. 1-14).
Question 12 [Last update: 31/05/2017]
What is meant by 'continuous' assessment and monitoring of market and credit risk in Article 17(2) of RTS 6 which relates to investment firms' post trade controls?
Answer 12
Article 17(2) of RTS 6 includes as part of the post-trade controls that investment firms engaged in algorithmic trading must have in place the 'continuous assessment and monitoring of market and credit risk of the investment firm in terms of effective exposure'.
Since there is no requirement to operate this continuous assessment in real-time on an ongoing basis, intraday and/or end of day checks as appropriate can be carried out at entity level. However, it is noted that the investment firm must have the capability to calculate in real time if necessary and on the basis of the information that it has: a) its outstanding exposure; b) the outstanding exposure of each of its traders and c) the outstanding exposure of clients (Article 17(3) RTS 6).
ESMA notes that for that purpose, the reconciliation of the firm's own records with those provided by trading venues, clearing members, central counterparties, brokers, DEA providers or any other business partners must be made in real time when those counterparties provide the information in real time.
Question 13 [Last update: 07/07/2017]
Does the format established for the record-keeping obligations of HFT firms established in RTS 6 apply to their non-algorithmic trading desks?
Answer 13
In addition to the general obligation of investment firms to maintain records of all orders and transactions in financial instruments under Article 25 of MiFIR, Article 17(2) of MiFID II establishes the obligation of investment firms engaged in HFT 'to store in an approved form accurate and time sequenced records of all its placed orders, including cancellations of orders, executed orders and quotations on trading venues'.
For investment firms simultaneously engaging in HFT and non-HFT activities there are two formats that have to be considered:
The format established in Annex 2 of RTS 6 has to be used to record the messaging activity related to activity using HFT technique. ESMA considers that 'activity using HFT technique' only includes the algorithmic proprietary trading activity of the firm on a trading venue with respect to any liquid instruments (see Article 19 of Commission Delegated Regulation (EU) 2017/565).
With respect of the timestamping of those records (see fields 23 and 24 of table 3 of Annex II of RTS 6), the activity using HFT technique has to be timestamped within 1 microsecond or better (Table 2 of Annex to RTS 25, to which RTS 6 cross-refers).
Non-HFT activity has to be recorded under the format established by Commission Delegated Regulation (EU) 2017/565. However, nothing prevents these investment firms from using Annex 2 of RTS 6 to record their non-HFT trading activity if their NCA so agrees.
ESMA reminds that all other non-HFT algorithmic trading activity should be timestamped in one millisecond or better as provided for under 'any other trading activity' as specified in Table 2 of the Annex of RTS 25, to which Commission Delegated Regulation (EU) 2017/565 cross-refers.
Question 14 [Last update: 07/07/2017]
Article 2(2) of Commission Delegated Regulation (EU) 2017/582 (RTS 26) requires trading venues to provide tools to ensure pre-execution screening on an order-by-order basis by each clearing member of the limits set and maintained by that clearing member for its client pursuant to RTS 6. Which specific provision of RTS 6 is the reference to limits in Article 2(2) of RTS 26 referring to?
Answer 14
The reference made to RTS 6 in Article 2(2) of RTS 26 is referring to Article 26 of RTS 6.
Question 15 [Last update: 07/07/2017]
Article 2(1) of RTS 26 provides an exemption from pre-trade, order-by-order checking for onvenue traded cleared derivatives if certain conditions are met. When this exemption applies to clearing members, does it also exempt clearing members from the requirement under Article 26(2) of RTS 6 to have 'appropriate pre-trade and post-trade procedures for managing the risk of breaches of position limits'?
Answer 15
General clearing members and trading venues are not required to subject client orders for cleared derivative transactions on a trading venue to the relevant pre-trade checks required under RTS 26 where the conditions set out in Article 2(1) of RTS 26 are met. However, pursuant to Article 26(2) of RTS 6, they should have other pre-trade procedures to manage the risk of breaches of position limits by their clients, by way of appropriate margining practice and other means.
Question 16 [Last update: 07/07/2017]
Does the 'kill functionality' require having to integrate different systems in-house using a software approach so that a single button can cancel all orders in all asset classes for all house trading and client trading?
Answer 16
The requirement for an investment firm to have a kill functionality pursuant to Article 12 of RTS 6 obliges the firm to have the ability as an emergency measure to immediately pull any or all outstanding orders from any or all trading venues. ESMA considers that effective kill functionality is essential for ensuring adequate risk management and safeguarding of the orderly functioning of the market, given the risks to which algorithmic trading firms are exposed, in particular in situations where an algorithm is not behaving as expected.
In practical terms, this does not create an obligation for all systems connecting the firm to different trading venues to be implemented through a single unified piece of software, in particular when the investment firm comprises different trading systems. The functionality can comprise both procedures and switches that should be adjusted to the characteristics of the systems operated by the investment firm. For instance, when there is a unified system, a button could be set at the highest level of the system, with adequate and gradual procedures so as to limit risks of disorderly markets conditions. In any case, a single decision of the investment firm should be able to result in an immediate withdrawal of all orders or any subset of them.
Question 17 [Last update: 07/07/2017]
Under Article 3(2)(a) of Commission Delegated Regulation (EU) 2017/580 (RTS 24), there is a requirement to flag orders submitted to a trading venue 'as part of a market making strategy pursuant to Articles 17 and 48 of [MiFID II]'. Should a firm start flagging orders when it decides to submit orders with a view to make markets in a particular instrument, or only when it concludes a formal agreement with the trading venue subsequent to triggering such an obligation under Article 1 of Commission Delegated Regulation (EU) 2017/578 (RTS 8)?
Answer 17
The primary purpose of flagging as required under Article 3(2)(a) of RTS 24 is to enable efficient detection of market manipulation by distinguishing the order flow from an investment firm based on pre-determined terms established by the issuer or the trading venue from the order flow of the investment firm acting at its own discretion (see Recital 6 of RTS 24).
ESMA therefore expects that only those orders submitted to a trading venue as part of a market making strategy subsequent to the conclusion of a market making agreement with the relevant trading venue should be flagged as such in field 8 as designated in Table 2 of the Annex of RTS 24. The same applies to field 3 of Table 3 of Annex II of RTS 6.
Question 18 [Last update: 07/07/2017]
Could trading venues set out different OTRs for different types of market participants (e.g. firms engaged in a market making scheme)?
Answer 18
As clarified by Recital 3 of Commission Delegated Regulation (EU) 2017/566 (RTS 9) trading venues may set the maximum ratio of unexecuted orders to transactions at the level they consider appropriate to prevent excessive volatility in the financial instrument concerned.
Nothing prevents trading venues from setting the limits on the basis of the different categories of market participants that operate in their systems. In particular, trading venues may determine a specific limit ratio for members or participants subject to market making obligations under a written agreement (Article 17(2) of MiFID II) or a market making scheme (Article 48(2)(b) of MiFID II).
The ratio limiting the number of unexecuted orders to transactions should be set in compliance with the objective of Article 48 of MiFID II and supported by statistical analysis of the activity of the different categories of members or participants and the liquidity of the instruments in which they operate.
Question 19 [Last update: 07/07/2017]
In terms of the Order to Trade Ratio (OTR), how should a trading venue tackle cases where a market participant has executed no trades after the submission of a high number of orders?
Answer 19
RTS 9 describes the methodology to calculate the actual OTR incurred by each member or participant of a trading venue using a fraction. In case there have been no trades, a strict application of the proposed methodology is not possible since one cannot divide by zero.
ESMA is of the view that trading venues should consider that the maximum OTR has been breached if the orders submitted without executing one single transaction surpassed the maximum authorised number of orders that can be sent for one transaction being executed.
For instance if the maximum OTR set by the trading is 10, members or participants should not sent more than 10 orders without executing one transaction.
Question 20 [Last update: 07/07/2017]
Article 1(2)(d) of RTS 8 establishes that quotes shall be deemed to have competitive prices where they are posted at or within the maximum bid-ask range set by the trading venue. Does this mean that trading venues have to have published maximum bid-ask ranges for all instruments traded on their venues or only for the instruments on which they have a market making scheme in place?
Answer 20
There are two different obligations when an investment firm is pursuing a market making strategy in trading venues allowing or enabling algorithmic trading through their systems:
a) There is a generic obligation, not restricted to specific financial instruments, for trading venues to sign written market making agreements with all investment firms pursuing a market making strategy on their systems (Article 48(2) and Article 17(3) and (4) of MiFID II) when the circumstances described in Article 1(2) of RTS 8 are met; and
b) Trading venues must have market making schemes in place only with respect to the instruments listed in Article 5 of RTS 8.
In order for investment firms to assess whether they are posting competitive prices on a trading venue and may therefore potentially qualify as engaging into a market making strategy, and have to enter into a market making agreement, trading venues enabling or allowing algorithmic trading through their systems must make public a maximum bid-ask range for each financial instrument they made available for trading.
ESMA notes that trading venues may group financial instruments when setting the maximum bid-ask spread for these purposes.
Question 21 [Last update: 07/07/2017]
Under which circumstances a trading venue may cancel, vary or correct a transaction?
Answer 21
Trading venues enabling or allowing algorithmic trading through their systems shall be able to cancel or revoke transactions in case of malfunctioning of the trading venue's mechanisms to manage volatility or of the trading system in the context of disorderly trading conditions, according to Article 18 of RTS 7.
However, Article 47(1)(d) of MiFID II also establishes the general organisational requirement for all trading venues 'to have transparent and non-discriminatory rules and procedures that provide for fair and orderly trading and establish objective criteria for the efficient execution of orders'. Therefore, the rulebook of a trading venue may foresee other exceptional situations in which transactions might be cancelled provided that those situations are transparent and non-discriminatory.
Question 22 [Last update: 03/10/2017]
Are the suitability checks and controls a DEA provider should perform on clients using the service also applicable in case of clients that are not investment firms authorised in the EU? Where a DEA client extends its access to its own clients, is the DEA provider responsible for the conduct of these sub-delegated clients?
Answer 22
Yes, the obligations that fall on a DEA provider as per Article 17(5) of MiFID II and as specified in RTS 6 apply regardless whether the client is an authorised EU investment firms or not. In particular, the DEA provider retains responsibility for all clients accessing an EU trading venue through its DEA, including the sub-delegated DEA clients, in relation to the requirements of Article 17(5) of MiFID II as well as provisions of Articles 19 to 23 of RTS 6.
In order to fulfil its responsibility, the DEA provider must have access to information on its DEA clients, irrespective of DEA clients' jurisdiction or their authorisation status. A DEA provider may not provide services to its clients, including sub-delegated clients, unless all information can be made available to the Competent Authority of the trading venue for its supervisory and enforcement purposes.
The DEA provider should also clarify in the binding written agreement that the DEA service will be suspended or withdrawn from the client if the provider is not satisfied that continued access would be consistent with its rules and procedures for fair and orderly trading and market integrity - this includes a situation where the client fails to supply a reasonable explanation for a suspicious trading pattern or inappropriate trading behaviour that may involve market abuse.
Where a DEA sub-delegation is allowed, the DEA provider should require its DEA clients to have a provision to enable the DEA provider to have access to information on their subdelegated clients' trading activities for the express purpose of enabling the DEA provider to provide information to the Competent Authority of the trading venue.
Furthermore, trading venues must observe Article 22(3) of RTS 7 when permitting sponsored access, and where appropriate DMA, to their members and participants. TVs should clearly state in their rules the circumstance in which the TV suspends or terminates the provision of DEA, for example, where the conduct of a DEA client is reasonably suspected to be abusive.
Question 24 [Last update: 15/11/2017]
Can DEA clients accessing an EU trading venue through sub-delegated DEA benefit from the exemption offered under Article 2(1)(d) of MiFID II?
Answer 24
Article 2(1)(d) of MiFID II exempts persons dealing on own account in financial instruments from the requirement to be authorised as a MiFID investment firm. However, it also lists a set of circumstances where such an exemption does not apply, including where such persons have DEA to a trading venue.
Article 4(1)(41) of MiFID II defines DEA as 'an arrangement where a member or participant or client of a trading venue permits a person to use its trading code so the person can electronically transmit orders relating to a financial instrument directly to the trading venue'. A person who directly interacts with the member to obtain the use of the trading code will be the person granted permission under an arrangement. The DEA provider has direct knowledge of that person's use and must be taken to allow it; such a person (Tier 1 DEA client) therefore should be understood to have DEA to a trading venue.
However, in some cases a DEA provider may allow a DEA user to sub-delegate the access rights onto a third entity (Tier 2 DEA client). Unlike a Tier 1 DEA client who directly interacts with the member to obtain the use of the trading code, a Tier 2 DEA client would, in most cases, not technically be in possession of the trading code of a DEA provider. The trading code is not passed down to the ultimate users of DEA, but only appended to the order message by the DEA provider before being submitted to the trading venue. Therefore, ESMA does not consider such Tier 2 DEA clients as having DEA for the purposes of Article 2(1)(d) of MiFID II.
ESMA notes that any risks posed by Tier 2 DEA clients are indirectly regulated through the provisions of Article 17(5) of MiFID II as well as Articles 22 and 23 of RTS 6.
In addition, Article 21(4) of RTS 6 requires the DEA providers to be able to identify the different order flows from the beneficiaries of such sub-delegation without being required to know the identity of the beneficiaries of such arrangement.
Question 25 [Last update: 15/11/2017]
Does a firm need to be authorised as an investment firm under MiFID II to provide DEA to an EU trading venue?
Answer 25
Yes, Article 48(7) of MiFID II provides that trading venues should only permit a member or participant to provide DEA 'if they are investment firms authorised under [MiFID II] or credit institution authorised under Directive 2013/36/EU'. Therefore, non-EU firms (including non-EU firms licensed in an equivalent jurisdiction) or EU firms without a MiFID II licence are not allowed to provide DEA to their clients. This applies regardless of where the clients using the DEA service are located.
Question 26 [Last update: 04/10/2018]
Article 6 of RTS 8 requires trading venues to set the incentives and the requirements that must be met by investment firms in order to access those incentives under stressed market conditions, taking into account the additional risks. What are the types of incentives to be provided under stressed market conditions by the trading venues to comply with this requirement?
Answer 26
RTS 8 sets forth an obligation for trading venues to provide incentives to market makers 'effectively contributing to liquidity provision under stressed market conditions' (Recital 8 of RTS 8). To this end, the market making schemes should 'clearly indicate the conditions for accessing incentives and should take into account the effective contribution to the liquidity in the trading venue measured in terms of presence, size and spread by the participants in the schemes' (Recital 9 of RTS 8).
On the basis of the individual trading system, trading venues still have the ability to adjust their scheme of incentives, which may well be of a 'monetary' or 'non-monetary' nature as long as they effectively support trading and provision of liquidity to the market on a regular and predictable basis and in particular when it is the most volatile.
In particular, trading venues should not induce market makers to leave an already depleted market or to privilege normal market conditions over stressed ones. This means that those schemes where an incentive is given to all market makers regardless of whether they effectively meet the requirements in terms of presence, size and spread set by the trading venues under stressed market conditions would not comply with RTS 8 obligations.
Similarly, trading venues can impose different market making quoting obligations during normal and stressed markets, provided that they should always be bound by Article 2(1)(b) of RTS 8. In this regard, relaxation of market making obligations should not be construed as an incentive.
Question 27 [Last update: 04/10/2018]
In the context of RTS 9, which is the order-counting methodology for bulk quotes?
Answer 27
A bulk quote is a bundle of multiple quotes, possibly on several financial instruments. As per Article 3 of RTS 9, where the methodology for counting orders for a specific order type is not detailed, the trading venue 'shall count the messages in accordance with the general system behind the methodology outlined and on the basis of the most similar order type appearing in the Annex'. According to the methodology in RTS 9, calculations should be performed at the level of each financial instrument and, furthermore, the Annex specifies that each quote should be counted as two orders (one for the buy side and one for the sell side). Accordingly, each order/quote sent within a bulk quote, should be treated individually and be counted as specified in the Annex of RTS 9.
Question 28 [Last update: 04/10/2018]
Do the provisions of Article 17(6) of MiFID II and of Chapter IV of RTS 6 apply to all general clearing members or only to those clearing members having algorithmic traders as clients?
Answer 28
Article 17(6) of MiFID II targets investment firms acting as general clearing members, without mentioning algorithmic trading nor restricting the scope to those clearing members having algorithmic traders as clients. Therefore, Article 17(6) should be interpreted as applying to all firms acting as general clearing members, regardless of the nature of their clients. Analogously, the provisions in Chapter IV of RTS 6 are drafted without any reference to algorithmic trading and should apply to all general clearing members. This reading is reinforced by Recital 1 of RTS 6, which defines the scope of RTS 6 differentiating on the one hand 'Investment firms engaged in algorithmic trading' and, on the other hand, those 'providing direct electronic access or acting as general clearing members'.
The title of Article 17 and RTS 6 should not be interpreted as narrowing the scope of the provisions in question, but rather suggesting that the issues addressed are more prominent with respect to algorithmic trading.
Question 29 [Last update: 14/11/2018]
Does the requirement imposed on market markers to post simultaneous two-way quotes of comparable size restrict the ability of market makers to voluntarily post additional liquidity on either side of the order book?
Answer 29
No, it is not the intention of RTS 8 to prevent market makers that have live two-way quotes from adding further liquidity in the order book on a voluntary basis. Market Makers are therefore free to discretionarily post additional quotes on either side of order book in addition to the 'simultaneous two-way quotes of comparable size and competitive price' imposed by Article 2(1)(b) of RTS 8. Only quotes that are posted to fulfil the obligations imposed by the market making agreement should be flagged as such in field 8 of Table 2 of the Annex of RTS 24 and field 3 of Table 3 of Annex II of RTS 6.
Question 30 [Last update: 01/02/2019]
How should the tests to identify high frequency trading techniques, described in Article 19 of CDR 2017/565, be undertaken?
Answer 30
Article 19 of Commission Delegated Regulation (EU) 2017/565 states the requirements for a trading technique to be deemed as high frequency algorithmic trading. Regarding the indicators in Articles 19(1)(a) & (b) firms should assess each instrument based on the relevant trading hours of that instrument for Article 19(1)(a), and sum those calculated indicators for all relevant instruments traded on a trading venue together for Article 19(1)(b). Regarding the applicability established in Article 19(2) firms should apply these calculations to liquid instruments according to the relevant ESMA publications at the time of calculation.
Question 31 [Last update: 05/12/2019]
To which types of trading systems does Commission Delegated Regulation (EU) 2017/584 RTS 7 apply? In particular, are trading venues without auto-matching trading systems or that explicitly prohibit algorithmic trading subject to the provisions of RTS 7?
Answer 31
Article 1 of RTS 7 limits the scope of application of RTS 7 to trading venues which ' allow or enable algorithmic trading '. Article 1(2) of RTS 7 defines those venues as trading venues ' where order submission and order matching is facilitated by electronic means '. The rationale is explained in Recital 3 which clarifies that ' risks arising from algorithmic trading can be present in any type of trading system that is supported by electronic means '.
ESMA further notes that Recital 5 of RTS 7 explicitly refers to request-for-quote systems, where transactions are usually not automatically executed based on pre-set parameters and logic (i.e. no auto-matching protocols), as being within the scope of the RTS. ESMA therefore consider that the absence of an auto-matching protocol should not exclude the trading venue operating such system from the scope of RTS 7.
Similarly, an explicit prohibition of algorithmic trading does not appear sufficient for the trading venue to be excluded from the scope of the RTS considering the definition of trading venues allowing or enabling algorithmic trading provided under Article 1(2).
Nevertheless, regarding the specific application of the provisions contained in RTS 7, Recital 5 clarifies that (i) ' some organisational requirements may not be appropriate for certain trading models although their trading systems could be supported to a certain extent by electronic means ' and that (ii) ' the specific requirements to be set in relation to request-for-quote systems or hybrid systems should be considered according to the nature, scale and complexity of the algorithmic trading activity undertaken '. ESMA would for instance consider it unreasonable to require a trading venue that explicitly prohibits algorithmic trading to offer to its clients a simulation facility for testing algorithms in conditions that are as realistic as possible (Article 10(2) of RTS 7).
Lastly, Recital 3 clarifies that voice trading systems are excluded from the scope of RTS 7. It is however important to stress that trading venues operating such systems remain subject to the organisational requirements prescribed under Article 48(1) of MiFID II.
Question 32 [Last update: 03/02/2021]
When a firm submits an order through DEA, which is then executed on-venue, should the resulting transaction be considered, from the DEA user perspective, as an on-venue or OTC transaction?
Answer 32
As per Article 4(1)(41) of MiFID II, DEA is a mechanism allowing a client to 'electronically transmit orders relating to a financial instrument directly to the trading venue' using the trading code of the DEA provider. Hence, a DEA trade should not be considered as a series of trades (i.e. one trade involving the DEA client and the DEA provider, one trade submitted by the DEA provider and executed on-venue), but rather as one single trade submitted by the DEA user and executed on-venue.
This interpretation is however without prejudice to other specific guidance provided by ESMA for ad hoc regulatory purposes as, for instance, in the Guidelines on 'Transaction reporting, order record keeping and clock synchronisation under MiFID II' (ref. ESMA/2016/1452, p.162).
Question 33 [Last update: 15/07/2022]
Do orders that are executed through trading functionalities which offer automated managing of the order qualify as algorithmic trading?
Answer 33
Yes. As specified in Article 4(1)(39) of MiFID II 'algorithmic trading' 'means trading in financial instruments where a computer algorithm automatically determines individual parameters of orders such as whether to initiate the order, the timing, price or quantity of the order or how to manage the order after its submission, with limited or no human intervention [...]'.
Hence, orders that are executed through functionalities which additionally to routing orders to trading venues offer automated managing of the order (e.g. automatically redirecting unexecuted portions of such orders to other venues or slicing orders prior to execution) should be in the scope of the MiFID II definition of algorithmic trading. Such functionalities differ from automated order routing systems, as the latter merely determine the trading venue (or trading venues) to which the order has to be sent without changing any parameter of the order (i.e. the order is unmodified in its components, including its size).
On the contrary, algorithmic trading encompasses both the automatic generation of orders and the optimisation of order-execution processes (e.g. slicing of orders) by automated means. Orders executed through such processes should therefore be flagged as algorithmic trading in line with the requirements under Articles 25(2) and 26(3) of MiFIR and Article 8 of RTS 22 and the further specification in Articles 2(c) of CDR 2017/580. Firms trading through these functionalities should also be considered as engaged in algorithmic trading and apply, the relevant requirements of Article 17 of MiFID II and RTS 6.
Question 34 [Last update: 15/07/2022]
How should firms ensure compliance with the requirements in Article 17 of MiFID II and RTS 6 when using third party systems which offer algorithmic trading functionalities?
Answer 34
When firms use third party systems offering algorithmic trading functionalities, they are ultimately responsible for compliance with the relevant requirements in Article 17 of MiFID II and RTS 6, as specifically detailed in Article 4 or RTS 6. However, lacking direct control over the system, its operation and the algorithms deployed, these firms might not be materially able to ensure that all requirements are met.
In such instances, firms can ensure compliance with those technical requirements that cannot be otherwise met by the firm itself through contractual arrangements with the system provider, where the latter commits to ensure that the system, its operation and the algorithms deployed are compliant with the relevant legal requirements.
Question 35 [Last update: 23/09/2022]
Can trading venues set specific trading hours which are applicable only to a sub-set of financial instruments (or to a specific financial instrument)?
Answer 35
Yes, a trading venue may set instrument-level trading hours for a specific sub-set of financial instruments (or for a specific financial instrument), provided that such specific trading hours
(and the instruments to which they apply) are made public and communicated by the venue to market participants.
As an example, trading venues may set specific trading hours based on the trading hours of the underlying market (where applicable) to facilitate liquidity provisions by market makers.
4 The tick size regime [Last update: 06/04/2021]
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.
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.
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 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: 06/04/2021]
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 including, for example, limit orders resting on an order book and orders held in an order management system.
However, the minimum tick size regime does not apply to the following:
transactions executed in systems that match orders on the basis of a reference price as per Article 4(1)(a) of MiFIR;
negotiated transactions as per Article 4(1)(b) of MiFIR; and
large-in-scale orders that are matched at the mid-point of bid and offer prices - as per Art 49(1) of MiFID, as amended.
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: 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.
Question 11 [Last update: 02/10/2019]
Are periodic auctions systems subject to the tick size regime?
Answer 11
Yes, periodic auction trading systems are subject to the tick size regime defined under Article 49 of MiFID II and further specified under CDR (EU) 2017/588. Therefore, market operators and investment firms operating such trading systems need to ensure that orders are submitted and that transactions are executed at a price that is in line with the mandatory tick size regime. For periodic auction systems that do not benefit from a reference price waiver, this prohibits the execution of transactions at a price that corresponds to the mid-point in cases where the spread consists of an uneven number of ticks.
5 Multilateral and bilateral systems [Last update: 16/12/2022]
5.1 General
Question 1 [Last update: 31/01/2017]
Can an MTF operator be a member/participant of its own MTF?
Answer 1
Whether an MTF operator may become a member of its own MTF requires the application of two different MiFID II articles.
Article 19 of MiFID II does not prevent an investment firm operating an MTF to be a member of its own MTF. However, Article 19(5) prohibits investments firms and market operators operating an MTF to execute client orders against proprietary capital, or to engage in matched principal trading. As a consequence, the investment firm could only operate on its own MTF through pure agency trading.
Article 18(4) also requires the operator of an MTF to have arrangements to identify clearly and manage the potential adverse consequences for the operation of the MTF or for its members or participants, of any conflict of interests between the MTF, their owners or the investment firm and market operator operating an MTF and its sound functioning.
Appropriate management of conflict of interest is all the more important to ensure the effective implementation of Article 31 of MiFID II, which requires investment firms and market operators operating an MTF to monitor the compliance of its members and participants with the rules of the MTF and with other legal obligations.
Therefore, unless otherwise demonstrated by adequate and effective internal arrangements and procedures, ESMA is of the view that the potential conflicts of interest that may arise as a result of this would only be managed effectively by means of operating the MTF and the membership through different legal entities.
To ensure that having two separate legal entities serves a meaningful purpose, ESMA is of the view that the two investment firms should have arrangements in place that prevent information sharing on each other's activities. This would include for instance having distinct management and operational teams and physical separation of activities. Similarly, whereas some elements of the IT infrastructure could be shared, execution systems would be expected to be segregated and safeguards to be put in place to prevent information leakage across the two entities. Outsourcing from one legal entity to the other should only take place where the arrangements meet a similar test.
The arrangements described above shall be without prejudice to the ability of the MTF to monitor its participants for compliance with market rules and other legal obligations and also without prejudice to the MiFID II provisions on identification and management of conflicts of interest to be met by each of the two investment firms.
Question 2 [Last update: 31/01/2017]
Would a trading venue locating its electronic systems on a third party data centre be required to comply with the co-location provisions under RTS 10 15 even where the venue is not providing the co-location service?
Answer 2
The principle underpinning Article 1 of RTS 10 is to ensure that electronic access to trading venues is fair and based on objective and non-discriminatory criteria. A trading venue should seek to ensure that this principle is not violated even when the connectivity service is provided by a third-party to members, participants or a client of the trading venue.