The EU financial regulator has moved forward with plans to amend the tick size regime under MiFID II to combat concerns that Brexit will leave trading venues in the EU at a competitive disadvantage.
A final proposed amendment to the regime authored by the European Securities and Markets Authority (ESMA) has been submitted to European Commission, which now has three months to decide whether it will endorse the proposal.
Under the current rules, the minimum tick size is applicable to shares in accordance with the adjusted average daily number of transactions on the most liquid market in the EU.
The markets authority said that while this is an adequate liquidity indicator for most equity instruments, it may not be suited to instruments where the most liquid venue is located outside of the European Union, such as the UK post-Brexit. EU trading venues could end up subject to minimum tick sizes that are larger than non-EU venues, as the mandatory tick size would be calculated based on a smaller subset of the global trading activity.
“This may unintentionally put EU venues at a competitive disadvantage, and may result in shallower liquidity on EU trading venues which could be detrimental to the interests of investors trading on EU venues and for orderly trading on EU markets,” ESMA said.
If endorsed by the European Commission, regulators of European trading venues will be allowed to calculate the average daily number of transactions on a case-by-case basis, taking into account the liquidity available on third-country venues in calibration of tick sizes.
In July, ESMA announced its intentions to review the tick size regime for countries outside of the European Union after finding that third-country instruments post-Brexit could total a significant 18% of the shares currently traded on authorised platforms.
“Today’s proposal aims to alleviate concerns about an unlevel playing field developing regarding tick sizes between third-country and EU trading venues,” said Steven Maijoor, chair of ESMA. “It also ensures that the applicable tick size in the EU is calibrated in a more convergent way.
“The proposed amendment is also relevant in the context of the United Kingdom’s withdrawal from the EU, which may result in a significant increase of the number of equity instruments for which the most liquid trading venue is located outside the Union.”