Faculty of Economics and Business Administration Publications Database

The MiFIR Trading Obligation: Impact on Trading Volume and Liquidity in Electronic Trading

Volume: 345
Pages: 3 - 26
ISSN-Print: 1865-1348
Link External Source: Online Version
Year: 2019
Keywords: MiFID II/MiFIR; Trading obligation; Liquidity; Trading volume; Electronic trading

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.