Abstract
The new financial market regulation MiFID II/MiFIR will fundamentally change the trading and market infrastructure landscape in Europe. One key aspect is the trading obligation for shares that intends to restrict over-the-counter (OTC) trading to ensure that more trading takes place on regulated trading venues and on platforms of Systematic Internalisers (SIs). In this context, market experts often argue that SIs might have a competitive advantage due to the best execution concept in combination with the possible exemption of SIs from the tick size regime. Applying scenario analysis, we determine the likely migration of OTC trading volume to regulated trading venues and SIs. Based on our data set, we investigate how changes in trading volume influence liquidity on open limit order book markets (lit markets). The results of our scenario analysis indicate that liquidity on lit markets might increase due to additional turnover formerly traded OTC. However, also a negative liquidity effect for lit markets and for the price discovery process is possible because of increased trading via SIs.
The authors acknowledge financial support from Deutsche Boerse AG.
Access this chapter
Tax calculation will be finalised at checkout
Purchases are for personal use only
Notes
- 1.
CESR, the predecessor of ESMA, defined Broker Crossing Networks as “internal electronic matching systems operated by an investment firm that execute client orders against other client orders or house account orders” [4].
- 2.
According to MiFIR Article 23 (1), trades can only be executed on an OTC basis if they are non-systematic, ad-hoc, irregular and infrequent, or are carried out between eligible and/or professional counterparties and do not contribute to the price discovery process. Article 2 of Commission Delegated Regulation (EU) 2017/587 (RTS 1) lists seven circumstances where trades do not contribute to the price discovery process: vwap-twap trades, portfolio trades, hedges, transfers among fund portfolios, give-ups/give-ins, collateral transfers, deliveries in case of exercises, securities financing transactions and buy-ins.
- 3.
Formerly Bats Europe.
- 4.
The complete analysis of the survey results can be found in [21].
- 5.
Cboe Europe operates both markets, Cboe BXE and Cboe CXE.
- 6.
Under MiFID I, orders that are above the LIS threshold can benefit from a waiver of pre-trade transparency. This waiver is intended to protect these orders from adverse market impact and to avoid significant price movements that can cause market distortion. For our sample of EURO STOXX 50 constituents, this LIS threshold is 500,000 .
- 7.
An overview of the Rosenblatt Securities, Inc. estimates for BCN market shares in Europe over time is available at
- 8.
Based on OECD data regarding household financial assets, equity holdings in the US represent 34.96% of a household’s total financial assets while this number amounts to 17.83% in Europe, which is 51% of the US figure. The European number is a weighted mean considering only those European countries where corporations listed in the EURO STOXX 50 are headquartered.
References
Acharya, V., Pedersen, L.: Asset pricing with liquidity risk. J. Financ. Econ. 77(2), 375–410 (2005)
Amihud, Y.: Illiquidity and stock returns: cross-section and time-series effects. J. Financ. Markets 5(1), 31–56 (2002)
Brauers, J., Weber, M.: A new method of scenario analysis for strategic planning. J. Forecast. 7(1), 31–47 (1988)
CESR: CESR technical advice to the European Commission in the context of the MiFID Review - equity markets. CESR/10-394 (2010). https://www.esma.europa.eu/sites/default/files/library/2015/11/10_394.pdf
Chordia, T., Roll, R., Subrahmanyam, A.: Co-movements in bid-ask spreads and market depth. Financ. Anal. J. 56(5), 23–27 (2000)
Chordia, T., Roll, R., Subrahmanyam, A.: Recent trends in trading activity and market quality. J. Financ. Econ. 101(2), 243–263 (2011)
Christensen, H.B., Hail, L., Leuz, C.: Capital-market effects of securities regulation: prior conditions, implementation, and enforcement. Rev. Financ. Stud. 29(11), 2885–2924 (2016)
Comerton-Forde, C., Malinova, K., Park, A.: Regulating dark trading: Order flow segmentation and market quality. Working Paper (2016)
Degryse, H., de Jong, F., van Kervel, V.: The impact of dark trading and visible fragmentation on market quality. Rev. Financ. 19(4), 1587–1622 (2015)
European Commission: IP/02/1706 press release: Investment services: Proposed new Directive would protect investors and help investment firms operate EU-wide (2002). http://europa.eu/rapid/press-release_IP-02-1706_en.htm
European Commission: Proposal for a Directive of the European Parliament and of the Council on markets in financial instruments repealing Directive 2004/39/EC of the European Parliament and of the Council (2011). http://ec.europa.eu/internal_market/securities/docs/isd/mifid/COM_2011_656_en.pdf
European Commission: Commission Delegated Regulation (EU) .../... of 28.8.2017 amending Delegated Regulation (EU) 2017/565 as regards the specification of the definition of systematic internalisers for the purposes of Directive 2014/65/EU (2017). http://ec.europa.eu/info/law/better-regulation/initiative/109985/attachment/090166e5b4ac6f24_en
European Commission: Commission Delegated Regulation (EU) 2017/588 supplementing Directive 2014/65/EU of the European Parliament and of the Council with regard to the regulatory technical standards on the tick size regime for shares, depositary receipts and exchange-traded funds (2017). http://eur-lex.europa.eu/legal-content/EN/TXT/PDF/?uri=CELEX:32017R0588&from=en
European Parliament and Council: Directive 2004/39/EC of 21 April 2004 on markets in financial instruments (MiFID I) (2004). http://eur-lex.europa.eu/legal-content/EN/TXT/PDF/?uri=CELEX:32004L0039&qid=1494934175734&from=EN
European Parliament and Council: Directive 2014/65/EU of 15 May 2014 on markets in financial instruments (recast) (MiFID II) (2014). http://eur-lex.europa.eu/legal-content/EN/TXT/PDF/?uri=CELEX:32014L0065&from=EN
European Parliament and Council: Regulation (EU) No 600/2014 of 15 May 2014 on markets in financial instruments (MiFIR) (2014). http://eur-lex.europa.eu/legal-content/EN/TXT/PDF/?uri=CELEX:32014R0600&from=EN
Federation of European Securities Exchanges: European equity market report (2017). http://www.fese.eu/statistics-market-research/european-equity-market-report
Federation of European Securities Exchanges: Tick size regimes (2017). http://www.fese.eu/statistics-market-research/tick-size-regimes
Fidessa: Fidessa fragmentation index: Making sense of global fragmentation (2017). http://fragmentation.fidessa.com/
Flannery, M.J., Kwan, S.H., Nimalendran, M.: Market evidence on the opaqueness of banking firms’ assets. J. Financ. Econ. 71(3), 419–460 (2004)
Gomber, P., Clapham, B., Lausen, J., Panz, S.: The impact of MiFID II/MiFIR on european market structure: a survey among market experts. J. Trading 13(2), 35–46 (2018)
Gomber, P., Jäger, B.: MiFID: Eine systematische Analyse der Zielerreichung. Zeitschrift für Bankrecht und Bankwirtschaft 16(1), 40–53 (2014)
Gomber, P., Sagade, S., Theissen, E., Weber, M.C., Westheide, C.: The state of play in European over-the-counter equities. J. Trading 10(2), 23–32 (2015)
Gomber, P., Sagade, S., Theissen, E., Weber, M.C., Westheide, C.: Spoilt for choice: Order routing decisions in fragmented equity markets. Working Paper (2016)
Gomber, P., Schweickert, U., Theissen, E.: Liquidity dynamics in an electronic open limit order book: an event study approach. Eur. Financ. Manage. 21(1), 52–78 (2015)
Gresse, C.: Effects of lit and dark market fragmentation on liquidity. J. Financ. Markets 35, 1–20 (2017)
Hendershott, T., Charles, J.M., Menkveld, A.J.: Does algorithmic trading improve liquidity? J. Finance 66(11), 1–33 (2011)
Hirschman, A.O.: The paternity of an index. Am. Econ. Rev. 54(5), 761–762 (1964)
Huss, W.R.: A move toward scenario analysis. Int. J. Forecast. 4(3), 377–388 (1988)
Lambert, R.A., Leuz, C., Verrecchia, R.E.: Accounting information, disclosure, and the cost of capital. J. Account. Res. 45(2), 385–420 (2007)
O’Hara, M., Ye, M.: Is market fragmentation harming market quality? J. Financ. Econ. 100(3), 459–474 (2011)
Oxera Consutling Ltd.: Monitoring prices, costs and volumes of trading and post-trading services: Report prepared for European Commission DG Internal Market and Services: (MARKT/2007/02/G)
Pástor, Ľ., Stambaugh, R.F.: Liquidity risk and expected stock returns. J. Polit. Econ. 111(3), 642–685 (2003)
Postma, T.J., Liebl, F.: How to improve scenario analysis as a strategic management tool? Technol. Forecast. Soc. Change 72(2), 161–173 (2005)
Rosenblatt: Let there be light: Rosenblatt’s monthly dark liquidity tracker (2017). http://rblt.com/lettherebelight_details.aspx?id=715
Schoemaker, P.J.H.: Scenario planning: a tool for strategic thinking. Sloan Manage. Rev. 36(2), 25–40 (1995). https://search.proquest.com/docview/1302991850?accountid=10957
Author information
Authors and Affiliations
Corresponding author
Editor information
Editors and Affiliations
A Appendix
A Appendix
1.1 A.1 Volume Migration Scenarios
1.2 A.2 Sensitivity Analysis
Having identified the effects of the trading obligation on market share distribution in European equity trading and on main market liquidity according to the three scenarios, this section provides the results of a sensitivity analysis with respect to the chosen volume migration thresholds for the identified OTC trade size categories. Since large trades are highly likely to classify for the exemptions of the trading obligation, we keep the threshold of the “OTC Large” category constant at 0% for the sensitivity analysis since this assumption is supported by 98% of the survey respondents. The migration threshold of the “OTC Small” (“OTC Medium”) category is varied between 15% and 60% (5% and 45%) for sensitivity purposes. Table 4 shows the results of the sensitivity analysis for the effect of the trading obligation on changes in market shares of lit markets. The shaded area (“39/22/0”) of Tables 4 and 5 shows the estimated migration of OTC volumes in the different size categories according to our survey among market experts. In all cases, scenarios A and B lead to positive effects of the trading obligation for lit markets increasing turnover in EURO STOXX 50 constituents relative to other trading categories. Scenario C, however, only leads to a rising market share of lit markets if the fraction of migrating volume from the small and medium OTC trade size category is large enough, i.e. more than 45% of the “OTC Small” and more than 30% of the “OTC Medium” category, to compensate the volume migration from lit markets to SIs. In all other cases of scenario C, the trading obligation leads to declining market shares of lit markets.
The varying amount of migrating volume to lit markets also leads to different effects on main market liquidity. Table 5 reports the results of the sensitivity analysis with varying migration thresholds of the OTC trade size categories for the three different liquidity measures spread, Depth(10 bps) and XLM50k on the main market. Similar to the effect on market shares of lit markets, main market liquidity increases in both scenarios A and B indicated by decreasing spreads and round trip transaction costs measured by XLM50k. Also, order book depth increases. In scenario C, however, liquidity on the main market decreases for most depicted OTC migration thresholds and only increases if the fraction of migrating small and medium sized OTC trades to lit markets is large enough.
Rights and permissions
Copyright information
© 2019 Springer Nature Switzerland AG
About this paper
Cite this paper
Gomber, P., Clapham, B., Lausen, J., Panz, S. (2019). The MiFIR Trading Obligation: Impact on Trading Volume and Liquidity in Electronic Trading. In: Mehandjiev, N., Saadouni, B. (eds) Enterprise Applications, Markets and Services in the Finance Industry. FinanceCom 2018. Lecture Notes in Business Information Processing, vol 345. Springer, Cham. https://doi.org/10.1007/978-3-030-19037-8_1
Download citation
DOI: https://doi.org/10.1007/978-3-030-19037-8_1
Published:
Publisher Name: Springer, Cham
Print ISBN: 978-3-030-19036-1
Online ISBN: 978-3-030-19037-8
eBook Packages: Computer ScienceComputer Science (R0)