Price Discovery in Liquid UK Shares Pre and Post MiFID

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.