Market Transparency and Best Execution: Bond Trading under MiFID

Abstract

The relationship between best execution and market transparency deserves careful consideration in an analysis of MiFID. Best execution has mainly been studied with respect to equity trading, which is generally exchange based and widely regulated also with respect to market transparency. In this chapter, however, I focus on bond trading, which takes place predominantly over-the-counter (OTC) and is not subject to MiFID’s transparency provisions. After introducing the topic (part I), I offer a critical view of the transparency requirements applicable to equity trades and their formation (part II). I then examine the recent policy discussion on non-equities market transparency, as reflected in the Report issued by the European Commission under Article 65 (1) of the MiFID, examining whether the requirements for pre-trade and post-trade information should be extended to non-equities markets (part III). I finally consider the role of best execution in bond markets, focussing on the impact of transparency on order execution for retail investors (part IV). In part V, I draw some conclusions.

Keywords: Best execution, trading venues, MiFID, bonds, financial markets

JEL Classification: G1, G2, G14, G15, G28, K22