Internalization in European Equity Markets Following the Adoption of the EU Mifid Directive

19 Pages Posted: 31 Jan 2007 Last revised: 22 Jan 2009

See all articles by Giovanni Petrella

Giovanni Petrella

Università Cattolica del Sacro Cuore

Mario Anolli

Università Cattolica del S. Cuore

Multiple version iconThere are 2 versions of this paper

Date Written: February 22, 2007


The European Union's Markets in Financial Instruments Directive (MiFID), that will be implemented by October 2007, significantly modifies the regulation of the European securities industry. It will allow, among other things, investment firms to act as systematic internalizers. A systematic internalizer is an investment firm dealing on its own account to execute client orders outside a regulated market or a multilateral trading facility (MTF). Specifically, the new regulation requires systematic internalizers to publish firm quotes on liquid shares when dealing for retail quantities. In short, systematic internalizers are market makers on liquid stocks who execute small trades.

This paper uses order flow and limit order book data in order to estimate the internalization rate (i.e., the portion of the total order flow that could be internalized), to estimate the internalization expected revenues, and to investigate the main factors affecting both the internalization rate and the magnitude of internalization revenues. To simulate the systematic internalization activity we collected detailed order flow data for 57 liquid stocks traded on the Italian Stock Exchange, which is a currently concentrated market. To be internalized, an order should jointly satisfy the following two requirements (expressly requested by the Level 1 law text). First, the quantity of the order should not be greater than the estimated standard market size (SMS). Second, the price limit of the order should be compatible with immediate execution by a systematic internalizer in respect of the best execution principle. Based on this procedure we identify internalized orders and compute estimates of internalization rate, gross trading revenues, spread revenues and positioning revenues on a per stock per day basis and on a per internalizer firm per day basis.

Our main findings relate to (i.) the relationship between internalization rates and stocks turnover; (ii.) the size and variability of internalization trading revenues; (iii.) the value of the inventories for an internalizer firm.

Keywords: MiFID Directive, Internalization, Market Making Revenues, Italian Stock Exchange

JEL Classification: G10, G15, G24

Suggested Citation

Petrella, Giovanni and Anolli, Mario, Internalization in European Equity Markets Following the Adoption of the EU Mifid Directive (February 22, 2007). Available at SSRN: or

Giovanni Petrella (Contact Author)

Università Cattolica del Sacro Cuore ( email )

Largo Gemelli 1
Milano, 20123
+39 02 72343007 (Phone)

Mario Anolli

Università Cattolica del S. Cuore ( email )

via Necchi 5
20123 Milano
+390272342465 (Phone)

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