MiFID - Spirit and Reality of a European Financial Markets Directive

Abstract:     
MiFID’s key objectives are market efficiency, market integrity, and fairness. By defining a new trading venue classification (i.e., Regulated Markets, Multilateral Trading Facilities, and systematic internalisers) and by enabling these venues to compete on a level playing field in terms of fees, services, and technology, the Directive tries to encourage innovation, reduce explicit and implicit trading costs for investors, and reduce the cost of capital for issuers.

However, in practice, the OTC side of the market has not been touched by the MiFID regulation. The status of European markets reveals that the competition between Regulated Markets and the newly emerged MTFs works. However, there are only a few investment firms that are registered as systematic internalisers, and transactions carried out on an OTC basis represent a significant (around 40%) and stable part of the trading volume in the European equity market.

In reality, trading activity currently reported as OTC activity is very different from the original MiFID intention. MiFID characterizes OTC transactions in Recital 53 as transactions that cumulatively fulfill the requirements of being ad hoc and irregular, carried out with wholesale counterparties, above standard market size, and conducted outside systems used for systematic internalization. However, our analysis of individual OTC trade size data between January 2008 and April 2010 both for high liquids (EURO STOXX 50 constituents) and a sample of less liquid securities shows that a significant share of OTC transactions are neither above SMS nor would they face market impact if concluded on open, public order books.

Number of Pages in PDF File: 93

Keywords: MiFID, financial regulation, OTC

JEL Classification: G14, G15, G24

working papers series