Price Discovery in Liquid UK Shares Pre and Post MiFID

Posted: 14 Apr 2013

See all articles by Michael J. Aitken

Michael J. Aitken

Macquarie Graduate School of Management

Frederick H. deB. Harris

Wake Forest University; Capital Markets CRC Limited (CMCRC)

Frank Sensenbrenner

Johns Hopkins University - Paul H. Nitze School of Advanced International Studies (SAIS)

Date Written: October 23, 2010

Abstract

In 2007, the European Commission instituted the Markets in Financial Instruments Directive (MiFID), a public policy measure intended to establish a pan-European market for shares. Introducing a ‘passport’ function for clearing and settlement plus a best execution mandate, MiFID proved to be a catalyst for the growth of new multilateral trading facilities (MTFs). MTFs are designed to serve a fast-growing breed of technological traders who heavily use computer algorithms and other techniques demanding low latency. As MTFs proliferated in 2007-2008, European order flow fragmented on those national exchanges previously subject to a concentration rule. When fragmentation occurred in response to RegNMS in the U.S., price discovery migrated away from the central exchange. In contrast, we demonstrate that the introduction of MiFID had no such comparable effects on the price discovery process in London. Instead, seven months later, after a stark clearing and settlement fee schedule change by Chi-X, we document a surprisingly large information impounding attributable to the migration of high frequency traders to Chi-X.

Keywords: MiFId, High Frequency Trading

JEL Classification: G12

Suggested Citation

Aitken, Michael J. and Harris, Frederick (Rick) H. deB. and Sensenbrenner, Frank, Price Discovery in Liquid UK Shares Pre and Post MiFID (October 23, 2010). Available at SSRN: https://ssrn.com/abstract=2250459 or http://dx.doi.org/10.2139/ssrn.2250459

Michael J. Aitken

Macquarie Graduate School of Management ( email )

North Ryde
Sydney, New South Wales 2109
Australia

Frederick (Rick) H. deB. Harris

Wake Forest University ( email )

2601 Wake Forest Road
Babcock Graduate School of Management
Winston-Salem, NC 27109
United States
336-758-5112 (Phone)

Capital Markets CRC Limited (CMCRC) ( email )

Level 3, 55 Harrington Street
Sydney, 2000
Australia

Frank Sensenbrenner (Contact Author)

Johns Hopkins University - Paul H. Nitze School of Advanced International Studies (SAIS) ( email )

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