The Impact of the EC Financial Instruments Markets Directive on the Trading Volume of EU Equity Markets

Abstract

The EC Directive on Financial Instruments Markets (MiFID) has introduced a number of order and trade publication obligations imposed on organized exchanges, Alternative Trading Systems (ATS), and the class of broker dealers that execute transactions in shares internally. This article investigates the impact of MiFID's trade transparency rules on the trading volume of EU equity markets in a forward-looking mode. The article aims to contribute to the debate among EU policy-makers as to the proper reach of the Directive's transparency rules. Since MiFID has not yet been implemented, a study of its actual impact on the trading volume of EU equity markets is not possible, thus, we must use data extracted from the closest possible precedent. Accordingly, the article uses data describing levels of trading volume before and after the introduction of a central order book in the London Stock Exchange (LSE) on 20 October 1997, when trading in FTSE100 stocks shifted from the quote-driven Stock Exchange Automatic Quotation System (SEAQ) to the order-driven Securities Electronic Trading Service (SETS). This change resulted in significantly increased transparency standards. Trading volume is measured in this article on the basis of three criteria: volume-based turnover, value-based turnover and turnover ratio. No conclusive evidence is found indicating that the introduction of a central order book and attendant higher transparency standards lead per se to higher levels of trading volume, used as one of the indicators of a liquid market. Therefore, the impact of MiFID's transparency rules on trading volume and overall levels of liquidity in EU equity markets should become a matter of further study for EU policy-makers and regulators.