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2019 | OriginalPaper | Chapter

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

Authors : Peter Gomber, Benjamin Clapham, Jens Lausen, Sven Panz

Published in: Enterprise Applications, Markets and Services in the Finance Industry

Publisher: Springer International Publishing

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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.

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Appendix
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Footnotes
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 https://static-content.springer.com/image/chp%3A10.1007%2F978-3-030-19037-8_1/484019_1_En_1_IEq6_HTML.gif .
 
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.
 
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Metadata
Title
The MiFIR Trading Obligation: Impact on Trading Volume and Liquidity in Electronic Trading
Authors
Peter Gomber
Benjamin Clapham
Jens Lausen
Sven Panz
Copyright Year
2019
Book
Enterprise Applications, Markets and Services in the Finance Industry

Print ISBN: 978-3-030-19036-1

Electronic ISBN: 978-3-030-19037-8

Copyright Year: 2019

DOI
https://doi.org/10.1007/978-3-030-19037-8_1

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