Systematic Internalisers - The New Trading Animals in Europe

Abstract:     
Regulation of European financial markets has been changing tremendously since the late 90s. The Financial Service Action Plan (FSAP), set up in 1999 by the European Commission, contains 42 projects each focussing on the integration and harmonisation of the European market for financial services and products. The centerpiece of the FSAP is the Markets in Financial Instruments Directive (MiFID; see European Union 2004). The legislations goal is to promote an efficient, transparent and integrated financial trading infrastructure, to strengthen investors protection and market integrity and to reinforce co-operation between competent authorities. Furthermore, it extends the scope of the predecessor directive, the Investment Service Directive (ISD) of 1993, in terms of financial services, financial instruments and of the European passport that allows investment firms and regulated markets to operate under a common set of rules and the supervision of the competent authorities of the respective home country. MiFID will have to be applied by investment firms and regulated markets from November 1st 2007.

In contrast to the ISD, MiFID abolishes prevailing concentration rules in the Member States in favour of competition between trading venues. It distinguishes regulated markets, Multilateral Trading Facilities (MTFs) and bilateral trading venues, i.e. Systematic Internalisers (SIs) and other bilateral OTC trading. While internalisation is a well-known business model in some EU countries, SIs appear with MiFID as a new labelled trading venue with own criteria for classification, regulation and requirements. Based on a brief description of the business model of internalisation in general, the goal of this paper is to highlight the MiFID requirements regarding SIs, to present the respective results of an empirical study among German investment firms, and to discuss prospects of this business model in the European trading landscape.

Keywords: MiFID, Internalization, Securities markets regulation

Accepted Paper Series