The MiFIR Trading Obligation: Impact on Trading Volume and Liquidity

32 Pages Posted: 8 Mar 2018  

Peter Gomber

Goethe University Frankfurt Faculty of Economics and Business Administration

Benjamin Clapham

Goethe University Frankfurt Faculty of Economics and Business Administration

Jens Lausen

Goethe University Frankfurt - Faculty of Economics and Business Administration

Sven Panz

Goethe University Frankfurt - Faculty of Economics and Business Administration

Date Written: February 28, 2018

Abstract

The new financial market regulation MiFID II/MiFIR will fundamentally change the trading and market infrastructure landscape in Europe. One key aspect is the trading obligation for shares that intends to restrict over-the-counter (OTC) trading to ensure that more trading takes place on regulated trading venues and on platforms of Systematic Internalisers (SIs). In this context, market observers often argue that SIs might have a competitive advantage due to the best execution concept in combination with the possible exemption of SIs from the tick size regime. Applying scenario analysis, we determine the likely migration of OTC trading volume to regulated trading venues and SIs. Based on our data set, covering intraday data including OTC trades as well as order book snapshots of EURO STOXX 50 constituents on major European venues, we investigate how changes in trading volume influence liquidity on lit markets. The results of our scenario analysis indicate that liquidity on lit markets might increase due to additional turnover formerly traded OTC. However, also a negative liquidity effect for lit markets and for the price discovery process is possible because of increased trading via SIs. According to this scenario, spreads might increase by 0.25%, round trip transaction costs of 50,000 € might increase by 0.92% and market depth 10 bps around the midpoint might decrease by 1.95% on lit venues. This effect on liquidity not only increases trading costs for investors in European equities trading, but also has a negative impact on issuers due to higher cost of capital and thereby on the real economy in Europe.

Keywords: MiFID II/MiFIR, trading obligation, liquidity, trading volume

JEL Classification: G14, G15, G18, G28

Suggested Citation

Gomber, Peter and Clapham, Benjamin and Lausen, Jens and Panz, Sven, The MiFIR Trading Obligation: Impact on Trading Volume and Liquidity (February 28, 2018). Available at SSRN: https://ssrn.com/abstract=3133161 or http://dx.doi.org/10.2139/ssrn.3133161

Peter Gomber (Contact Author)

Goethe University Frankfurt Faculty of Economics and Business Administration ( email )

Grueneburgplatz 1
Frankfurt am Main, 60323
Germany

HOME PAGE: http://www.efinancelab.de/no_cache/team/?user_wiwipubs_pi2[showUid]=478

Benjamin Clapham

Goethe University Frankfurt Faculty of Economics and Business Administration ( email )

Theodor-W.-Adorno-Platz 4
Frankfurt am Main, 60323
Germany

Jens Lausen

Goethe University Frankfurt - Faculty of Economics and Business Administration ( email )

Theodor-W.-Adorno-Platz 4
Frankfurt am Main, D-60323
Germany

Sven Panz

Goethe University Frankfurt - Faculty of Economics and Business Administration ( email )

Theodor-W.-Adorno-Platz 4
Frankfurt am Main, D-60325
Germany

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