EC agrees to apply tick size regime to SIs, but with an amendment

European Commission agrees to extend the tick size regime to SIs, as long as it is limited to shares and depositary receipts only.  

Systematic internalisers (SIs) operating under MiFID II in Europe will be subject to the tick size regime after the European Commission endorsed the proposal, albeit with a suggested amendment.

The European Securities and Markets Authority (ESMA) sent its proposal to the European Commission in March, urging that the tick size regime be applied to SIs for all equity and equity-like instruments.

The European Commission has responded with intentions to endorse the application of tick sizes on SIs , as long as it is limited to shares and depositary receipts only to address concerns about efficient price formation.

“ESMA continues to believe that its proposal to tie systematic internaliser quotes to price levels that can be traded on trading venues for all equity and equity-like instruments better achieves the legislative goals expressed in the empowerment of Article 14(7) of MiFIR,” the regulator said in a statement.

“ESMA however agrees with the Commission that any concerns about efficient valuation and price formation are most relevant for shares and also for depositary receipts due to their specific nature which is similar to shares.”

Forcing SIs to comply with the tick size regime has been the subject of debate since MiFID II came into effect at the start of the year. The first proposed amendment from ESMA to enforce the tick size rules on SIs was met with strong support from major exchange operators such as Cboe Europe, Nasdaq and the London Stock Exchange Group.

The trading venues argued that not being subject to the tick size rules allows SIs to provide price improvements, which could divert routing of client orders towards SIs rather than on-exchange venues.

ESMA did not amend its initial proposal following the consultation, and sent it to the European Commission for review in March. The letter of response from the European Commission, received by ESMA on 10 August, read that there is evidence that not applying the tick size regime to shares and depository receipts risks negative repercussions on the liquidity of those two asset classes.

“As efficient price formation is an important feature underpinning the introduction of tick size increments, SIs quoting prices for shares and depositary receipts below the standard market size should respect the tick size increments in order to accurately reflect prevailing market conditions,” the letter said.

It concluded that should ESMA agree to the terms laid out, the Commission will adopt the amendment as a matter of urgency. ESMA has agreed to limit the application of tick sizes to quotes of SIs to shares and depository receipts, and has now sent its revised draft for endorsement to the European Commission.