Skip to main content
SpringerLink
Log in

The MiFIR Trading Obligation: Impact on Trading Volume and Liquidity in Electronic Trading

  • Conference paper
  • First Online:
Enterprise Applications, Markets and Services in the Finance Industry (FinanceCom 2018)

Part of the book series: Lecture Notes in Business Information Processing ((LNBIP,volume 345))

  • 494 Accesses

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.

This is a preview of subscription content, log in via an institution to check access.

Access this chapter

Log in via an institution
Chapter
USD 29.95
Price excludes VAT (USA)
  • Available as PDF
  • Read on any device
  • Instant download
  • Own it forever
eBook
USD 39.99
Price excludes VAT (USA)
  • Available as EPUB and PDF
  • Read on any device
  • Instant download
  • Own it forever
Softcover Book
USD 54.99
Price excludes VAT (USA)
  • Compact, lightweight edition
  • Dispatched in 3 to 5 business days
  • Free shipping worldwide - see info

Tax calculation will be finalised at checkout

Purchases are for personal use only

Institutional subscriptions

Notes

  1. 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. 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. 3.

    Formerly Bats Europe.

  4. 4.

    The complete analysis of the survey results can be found in [21].

  5. 5.

    Cboe Europe operates both markets, Cboe BXE and Cboe CXE.

  6. 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. 7.

    An overview of the Rosenblatt Securities, Inc. estimates for BCN market shares in Europe over time is available at

    https://www.bloomberg.com/news/articles/2017-07-10/dark-pool-traders-find-mifid-workarounds-to-stay-in-the-shadows.

  8. 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

  1. Acharya, V., Pedersen, L.: Asset pricing with liquidity risk. J. Financ. Econ. 77(2), 375–410 (2005)

    Article  Google Scholar 

  2. Amihud, Y.: Illiquidity and stock returns: cross-section and time-series effects. J. Financ. Markets 5(1), 31–56 (2002)

    Article  Google Scholar 

  3. Brauers, J., Weber, M.: A new method of scenario analysis for strategic planning. J. Forecast. 7(1), 31–47 (1988)

    Article  Google Scholar 

  4. 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

  5. Chordia, T., Roll, R., Subrahmanyam, A.: Co-movements in bid-ask spreads and market depth. Financ. Anal. J. 56(5), 23–27 (2000)

    Article  Google Scholar 

  6. Chordia, T., Roll, R., Subrahmanyam, A.: Recent trends in trading activity and market quality. J. Financ. Econ. 101(2), 243–263 (2011)

    Article  Google Scholar 

  7. 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)

    Article  Google Scholar 

  8. Comerton-Forde, C., Malinova, K., Park, A.: Regulating dark trading: Order flow segmentation and market quality. Working Paper (2016)

    Google Scholar 

  9. 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)

    Article  Google Scholar 

  10. 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

  11. 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

  12. 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

  13. 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

  14. 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

  15. 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

  16. 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

  17. Federation of European Securities Exchanges: European equity market report (2017). http://www.fese.eu/statistics-market-research/european-equity-market-report

  18. Federation of European Securities Exchanges: Tick size regimes (2017). http://www.fese.eu/statistics-market-research/tick-size-regimes

  19. Fidessa: Fidessa fragmentation index: Making sense of global fragmentation (2017). http://fragmentation.fidessa.com/

  20. 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)

    Article  Google Scholar 

  21. 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)

    Article  Google Scholar 

  22. Gomber, P., Jäger, B.: MiFID: Eine systematische Analyse der Zielerreichung. Zeitschrift für Bankrecht und Bankwirtschaft 16(1), 40–53 (2014)

    Google Scholar 

  23. 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)

    Article  Google Scholar 

  24. Gomber, P., Sagade, S., Theissen, E., Weber, M.C., Westheide, C.: Spoilt for choice: Order routing decisions in fragmented equity markets. Working Paper (2016)

    Google Scholar 

  25. 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)

    Article  Google Scholar 

  26. Gresse, C.: Effects of lit and dark market fragmentation on liquidity. J. Financ. Markets 35, 1–20 (2017)

    Article  Google Scholar 

  27. Hendershott, T., Charles, J.M., Menkveld, A.J.: Does algorithmic trading improve liquidity? J. Finance 66(11), 1–33 (2011)

    Article  Google Scholar 

  28. Hirschman, A.O.: The paternity of an index. Am. Econ. Rev. 54(5), 761–762 (1964)

    Google Scholar 

  29. Huss, W.R.: A move toward scenario analysis. Int. J. Forecast. 4(3), 377–388 (1988)

    Article  Google Scholar 

  30. Lambert, R.A., Leuz, C., Verrecchia, R.E.: Accounting information, disclosure, and the cost of capital. J. Account. Res. 45(2), 385–420 (2007)

    Article  Google Scholar 

  31. O’Hara, M., Ye, M.: Is market fragmentation harming market quality? J. Financ. Econ. 100(3), 459–474 (2011)

    Article  Google Scholar 

  32. 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)

    Google Scholar 

  33. Pástor, Ľ., Stambaugh, R.F.: Liquidity risk and expected stock returns. J. Polit. Econ. 111(3), 642–685 (2003)

    Article  Google Scholar 

  34. Postma, T.J., Liebl, F.: How to improve scenario analysis as a strategic management tool? Technol. Forecast. Soc. Change 72(2), 161–173 (2005)

    Article  Google Scholar 

  35. Rosenblatt: Let there be light: Rosenblatt’s monthly dark liquidity tracker (2017). http://rblt.com/lettherebelight_details.aspx?id=715

  36. 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

Download references

Author information

Authors and Affiliations

  1. Goethe University Frankfurt, Theodor-W.-Adorno-Platz 4, 60323, Frankfurt am Main, Germany

    Peter Gomber, Benjamin Clapham, Jens Lausen & Sven Panz

Authors
  1. Peter Gomber
    View author publications

    You can also search for this author in PubMed Google Scholar

  2. Benjamin Clapham
    View author publications

    You can also search for this author in PubMed Google Scholar

  3. Jens Lausen
    View author publications

    You can also search for this author in PubMed Google Scholar

  4. Sven Panz
    View author publications

    You can also search for this author in PubMed Google Scholar

Corresponding author

Correspondence to Sven Panz .

Editor information

Editors and Affiliations

  1. Alliance Manchester Business School, Manchester, UK

    Nikolay Mehandjiev

  2. Alliance Manchester Business School, Manchester, UK

    Brahim Saadouni

A Appendix

A Appendix

1.1 A.1 Volume Migration Scenarios

Fig. 3.
figure 3

Effect of three different scenarios on the European equity trading landscape. Striped areas represent market shares that migrate to other trading categories. Numbers on the left indicate the percentage points that remain in the respective trading category, while numbers on the right represent the percentage points that move to other categories. If there is only one number, then the whole category either remains or migrates completely. The changes in market share and resulting trading volumes depicted in this figure are based on the assumption that 39% of the OTC trades smaller than 500,000 , 22% of the OTC trades between 500,000 and 50 mn , and none of the OTC trades larger than 50 mn will migrate to lit markets (according to the results of an online survey among 111 industry experts).

Full size image

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.

Table 4. Net effect of the trading obligation on lit markets regarding changes in market share. The results are based on varying migration thresholds of the three identified OTC trade size categories (OTC Small/OTC Medium/OTC Large). The shaded area highlights the results of the chosen values for the scenario analysis conducted in the previous section.
Full size table

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.

Table 5. Net effect of the trading obligation on main market liquidity. The results are based on varying migration thresholds of the three identified OTC trade size categories (OTC Small/OTC Medium/OTC Large). The shaded area highlights the results of the chosen values for the scenario analysis conducted in the previous section.
Full size table

Rights and permissions

Reprints and permissions

Copyright information

© 2019 Springer Nature Switzerland AG

About this paper

Check for updates. Verify currency and authenticity via CrossMark

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)

Publish with us

Policies and ethics

Search

Navigation