The tick size regime was not a competitive issue in Europe until MIFID I came into into force in 2007, as until then the national exchanges had the trading monopoly for the securities they had listed.
After MIFID I, the new players started using the tick size regime as a competitive factor, in a so called "race to the bottom": when faced with several venues with different tick sizes for the same security, market participants obviously prefer to trade in the one with the lowest tick size as it provides more flexibility.
Although lower tick sizes can have benefits such as allowing for lower bid/ask spreads, if they are excessively low they can also lead to fragmented market depths – very few orders or even only one order for each price level, including at the best bid and best ask – and to an adulteration of the order book's price-time priority scheme – if the tick size is 1/1000000, a participant can place a new order in front of the line without having to make a material increase (decrease) in the best bid (ask).
To avoid this situation, MIFID II introduced a harmonized tick size regime for equities and equity-like instruments, making all venues to have the same tick size for each security at a certain moment in time. In practice, venues have to follow a table (Annex of Commission Delegated Regulation [EU] 2017/588 of 14 July 2016 , also known as RTS 11), which gives the mandatory tick size for each security as a function of its price and liquidity (average daily number of transactions).
However, although this rule leveled the playing field between national exchanges and MTF, many argue that such venues now face unfair competition from systematic internalisers, which are exempt from applying the tick size regime.
However, although this rule leveled the playing field between national exchanges and MTF, many argue that such venues now face unfair competition from systematic internalisers, which are exempt from applying the tick size regime.
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