MiFID and a Changing Competitive Landscape

Abstract

In November 2007, the Markets in Financial Instruments Directive (MiFID) came into full effect. MiFID is the most significant European Union legislation for investment intermediaries and financial markets ever introduced. In general terms, MiFID is designed to provide a common, harmonized set of rules for the provision of investment services in each of the EU member states. A key feature of this legislation is the concept of a passport by which firms (e.g. investment banks, broker dealers, stock exchanges and alternative trading systems) are regulated primarily by their home state but can operate in other EU host states. MiFID also removes the so-called concentration rule, allowing greater competition for order flow across trading venues. This paper shows how new requirements concerning best execution, client classification, systematic internalisers, pre- and post-trade transparency, and the ownership of market data have created enormous new business opportunities. This paper argues that MiFID has already succeeded in its goal of introducing greater competition, as already made clearly evident by the early success of new trading venues such as Instinet Chi-X and new market data providers such as Markit BOAT. Further exchange consolidation, more sophisticated smart order routing, and new entrants such as BATS Europe, Nasdaq OMX Europe, and Project Turquoise suggest that European financial markets are on the cusp of further major (and unpredictable) changes. In addition to exploring developments in Europe, the paper explores the impact of international exchange linkages, such as NYSE Euronext, and contrasts the principles-based approach of MiFID with the rules-based approach of the SEC's RegNMS.

Keywords: MiFID, RegNMS, European securities regulation, internalization, transparency

JEL Classification: G00, G24, G28