Multilateral Trading Facilities Research Articles

Does smile help detect the UK's price leadership change after MiFID?

We investigate intraday realised volatility, trading volume, and information transmission following a series of changes to the Markets in Financial Instruments Directive (MiFID) in the UK. We find that multilateral trading facilities attract order flows from the London Stock Exchange (LSE) and hence introduce new dynamics to market provisions, such as volatility and information transmission. In addition, the structure of the order books and market depth changed after the introduction of MiFID in the UK. However, our novel study conveying smile patterns of volatility and volume suggests that the LSE continues to lead the rest of the multilateral venues. This shows that although MiFID has led to market segmentation, there is still clear price discovery among multilateral trading facilities.

Commonality in intraday liquidity and multilateral trading facilities: Evidence from Chi-X Europe

This paper examines the effects of Chi-X, a pan-European multilateral trading facility, on intraday liquidity co-movements within European equity markets. Chi-X enables simultaneous trading of all European equities on a single trading platform. Further, it induces an increase in multi-market trading between Chi-X and the home exchange, connecting individual markets in a single network. Greater market consolidation combined with an increase in multi-market trading should induce stronger network-wide liquidity co-movements. Consistent with our predictions, we find that Europe-wide liquidity co-movements increase after the Chi-X entry. The increase is stronger in down markets and for stocks with more intense trading on Chi-X.

Regulated Markets, Alternative Trading Venues & Systematic Internalisers in Europe

The purpose of this paper is to explain the similarities and differences between regulated markets (RMs), alternative trading venues (i.e. multilateral trading facilities / MTFs and organised trading facilities / OTFs), and systematic internalisers (SIs) in Europe. The structure of the paper is as follows. Paragraph II provides an overview of the main terms and definitions. Subsequently, the authors discuss the MiFID II scope in relation to RMs, alternative trading venues, and SIs (paragraph III). This is followed by a treatment of the organisational requirements for RMs, alternative trading venues, and SIs (paragraph IV). Then, the MiFID II pre- and post-trade transparency rules are discussed, both for equity (paragraph V) and nonequity (paragraph VI). The authors end with some concluding observations (paragraph VII).

Do Intra-day Auctions Improve Market Liquidity?

The intra-day auction launched by the London Stock Exchange (LSE) on 21 March 2016 was designed as a mechanism to boost midday liquidity. During the auction time, Multilateral Trading Facilities (MTFs) as competitors of the LSE, continue their normal trading. We examine the midday liquidity changes on both the LSE and MTFs and analyze their implications on platform competition. The intra-day auction in general improves liquidity at midday on both the LSE and MTFs. The intra-day auction helps consolidate the primary status of the LSE by increasing its market share at midday. Liquidity on MTFs drops considerably during the auction and bounces back toward the normal level when the auction ends. Overall, the midday liquidity patterns indicate the LSE's competitive advantages over MTFs in providing market liquidity after the launch of the intra-day auction.

Do intra-day auctions improve market liquidity?

The intra-day auction launched by the London Stock Exchange (LSE) on 21 March 2016 was designed as a mechanism to boost midday liquidity. During the auction time, Multilateral Trading Facilities (MTFs) as competitors of the LSE, continue their normal trading. We examine the midday liquidity changes on both the LSE and MTFs and analyze their implications on platform competition. The intra-day auction in general improves liquidity at midday on both the LSE and MTFs. The intra-day auction helps consolidate the primary status of the LSE by increasing its market share at midday. Liquidity on MTFs drops considerably during the auction and bounces back toward the normal level when the auction ends. Overall, the midday liquidity patterns indicate the LSE's competitive advantages over MTFs in providing market liquidity after the launch of the intra-day auction.

Stock-Market Behavior on Ex-Dates: New Insights from German Stocks with Tax-Free Dividend

We examine stock prices and the number of stocks traded around ex-dividend dates of German stocks with tax-free dividend. Tax-free dividends are temporarily tax-exempt, as they reduce the initial purchasing price of a stock. With our analysis of this particular group of German stocks, we can make clear predictions regarding ex-date prices and analyze the number of stocks traded around ex-dates, doing so without the systematic bias of cum-ex trades over time. For XETRA, our empirical results indicate that ex-date prices decline, on average, by the amount of the dividend. We do not find a significant relationship between a stock’s price-drop ratio and dividend yield. Further, the empirical analysis suggests that there is no significant correlation between an abnormal number of a stock being traded and its dividend yield. These results are most consistent with tax-motivated reasoning. However, our volume analysis reveals no consistency regarding the abnormal number of stocks traded for multilateral trading facilities.

Commonality in liquidity and multilateral trading facilities

AbstractWe use the introduction of two multilateral trading facilities (MTFs) to examine the impact of market fragmentation on commonality in liquidity. We find that the introduction of MTFs following the Markets in Financial Instruments Directive increases the comovement of stocks’ liquidity with MTF liquidity, while the comovement with the home market liquidity generally decreases. We also find that the higher the MTF trading volume or the number of MTFs trading a stock, the stronger the effect. Further, we find that the commonality in liquidity remains unchanged for a matched control sample of stocks that do not trade on MTFs.

Stock-Market Behavior on Ex-Dividend Dates: New Insights from German Tax-Free Dividend Stocks

We examine stock prices and the number of stocks traded around ex-dividend dates of German stocks with tax-free dividend. Tax-free dividends are temporarily tax-exempt, as they reduce the initial purchasing price of a stock. With our analysis of this particular group of German stocks, we can make clear predictions regarding ex-date prices and analyze the number of stocks traded around ex-dates, doing so without the systematic bias of cum-ex trades over time. For XETRA, our empirical results indicate that ex-date prices decline, on average, by the amount of the dividend. We do not find a significant relationship between a stock’s price-drop ratio and dividend yield. Further, the empirical analysis suggests that there is no significant correlation between an abnormal number of a stock being traded and its dividend yield. These results are most consistent with tax-motivated reasoning. However, our volume analysis reveals no consistency regarding the abnormal number of stocks traded for multilateral trading facilities.

The impact of multilateral trading facilities on price discovery: Further evidence from the European markets

AbstractThis study examines relative price discovery for three major European indices, FTSE, CAC, and DAX, their futures and exchange traded funds (ETFs) using the data on 5‐minute intraday transaction prices over a four‐year period. We computed both Hasbrouck (1995) information share with error bounds and Gonzalo and Granger's (1995) common factor weights approach. Gonzalo and Granger's (1995) common factor weights suggest the index futures contracts play a dominant role in price discovery in the CAC market: the CAC 40 index futures lead the price discovery and Lyxor CAC 40 ETFs serving the second resort for information transmission. This could be due to the less frequent trading of ETFs. More importantly, CAC40 under the Gonzalo & Granger (1995) test shows upper and lower error bounds in good range may be the main reason to drive for the meaningful results. In contrast, the upper and lower bounds estimated from the Hasbrouck (1995) are far distant for most cases. Finally, FTSE and DAX markets offer compelling evidence to show that ETFs lead price discovery and spots and futures follows.

Organizational Design, Competition, and Financial Exchanges

AbstractWe investigate the incentives for vertical and horizontal integration in the financial securities service industry. In a model with two exchanges and two central securities depositories (CSDs), we find that decentralized decisions might lead to privately and socially inferior industry equilibria with vertical integration of both CSDs with their respective exchanges. Allowing for horizontal integration of CSDs avoids privately inferior industry equilibria. However, we observe too little horizontal integration from the social perspective. We link our results to recent regulatory and institutional developments such as the emergence of multilateral trading facilities, over‐the‐counter regulation, and financial harmonization.

Italian Financial Transaction Tax Implications of the Evolving Regulatory Landscape: The Post-MiFID II Financial Market Ecosystem

This article outlines the Italian financial transaction tax implications of some of the new MiFID II and MiFIR rules for the EU financial markets. In particular, it focuses on the main changes to the market structure framework (distinction between bilateral and multilateral trading, MiFID II trading venues, trading obligation for shares and MiFID II trading capacities) and analyses the availability of the reduced Italian financial transaction tax rate/charges for trades executed on regulated markets and multilateral trading facilities.

The impact of multilateral trading facilities on price discovery

AbstractOur study aims to examine whether market segmentation and competition manifested in the proliferation of multilateral trading facilities (MTFs) improve market quality after the implementation of MiFID. To do this, we employ the Common Factor Weight and Weighted Price Contribution methods to study relative price discovery for three major MTFs—LSE, BATS, and Turquoise, using intra‐day, five‐minute transaction prices. The results suggest that the two trading venues, BATS and Turquoise, contribute more to impounding fundamental information, implying a shift in price dominance from traditional LSE to MTFs. In addition, the intra‐day price contributions of MTFs are higher than those of LSE, especially during the first and last periods of the day. The estimated average daily price contributions are consistent with this result.

Did informed order flow move to multilateral trading facilities? Evidence for some Eurozone countries

ABSTRACTThis paper investigates the effects of the fragmentation of European stock markets after MiFID application in 2007. Specifically, we discuss whether the process of fragmentation elicited a flight of informed trading from the primary stock exchanges to the incoming multilateral trading facilities (MTFs). Our sample covers 438 stocks traded on six important markets of the Eurozone and the period ranging from 2010 to 2015. Our findings demonstrate that, on average, primary exchanges still drive the process of price formation. However, MTF platforms have been gradually expanding their influence over the price discovery process of some of the stocks so that for a non-negligible minority of them, MTFs already lead the price discovery.

Fragmentation and Market Quality: The Case of European Markets

This paper questions whether the proliferation of alternative trading venues in Western Europe after MiFID implementation in 2007 affected market quality. By means of a difference-in-differences analysis, we evaluate changes in market quality of stocks that initiated trading in Multilateral Trading Facilities (MTF) in relation to matched samples. Our analysis provides evidence that the overall liquidity (measured by transaction costs and price impact) and trading activity increased in the short term with trade initiation in MTF. Notably, we show that fragmentation did not cause lower price precision or informativeness, but some tests suggest that fragmentation correlates positively with volatility. The results of this study are stronger for stocks with greater propensity for MTF trade initiation, i.e. stocks with greater size and liquidity prior to that event. Interestingly, the impact on liquidity and trading activity varied across stock exchanges and timing of MTF trade initiation. As for long run effects, our results suggest an improvement of overall liquidity and a neutral effect on the trading activity of traditional exchanges.

MiFID II and the relationship between public markets and systematic internalisers

This paper seeks to examine the evolution of the systematic internaliser (SI) regime in the context of the evolving regulatory landscape. A key goal of Markets in Financial Instruments Directive II (MiFID II) was to increase transparency in equity markets. The new regulations included curbs on dark trading, commonly referred to as the ‘double volume cap’, and introduced the trading obligation for equity and equity-like instruments, which effectively removed the category of ‘organised trading facility’ (OTF) for equity trading. This change essentially outlawed broker crossing networks (BCNs), removing one of the most widely used execution mechanisms since the original MiFID implementation in 2007. Regulated markets, multilateral trading facilities (MTFs) and systematic internalisers retained their ability to trade equities under the new regime. The suggestion that the removal of BCNs may lead to a very significant increase in SI activity has resulted in regulatory scrutiny. BCNs were used to cross client interest while SIs rely on principal liquidity to execute client orders and thus there are fundamental differences in the activities within both mechanisms. Moreover, there are concerns a network of interlinked SIs could negatively affect the transparency of equity markets, contrary to the spirit of the new regulations and deplete liquidity from lit markets.

Dark execution strategies under MiFID II: A few shades lighter?

While Markets in Financial Instruments Directive II (MiFID II) will introduce a host of transparency and trading reforms in Europe from January 2018, there remains uncertainty as to how existing dark execution strategies, in equities and other asset classes, will be accommodated under the revised framework. Dark execution strategies responding to market participants’ desire to reduce information leakage will not cease to exist when MiFID II rules come into force. How will existing dark multilateral trading facilities (MTFs) and broker crossing networks adapt? Does MiFID II spell the death of dark trading? What is the expected impact on lit and dark liquidity pools? The regulatory response post financial crisis has determined that the market needs to shift towards greater transparency to reduce systemic risk. It is complex to achieve an appropriate balance between the level of regulation and prescriptive rules versus allowing market forces to naturally determine where and how orders are executed. Full transparency is not appropriate for all types of trading, in particular for market actors seeking to exchange large block orders electronically. Appropriate calibration and ensuring a level playing field with a marketplace that is relatively simple to understand and interact with is likely to help investors achieve the best results.

Bank ownership of multilateral trading facilities and implications for historical exchanges: An industrial economics approach

The aim of this paper is to address bank ownership in Multilateral Trading Facilities (MTFs) and its implications for historical exchanges. We propose an oligopoly model with network effects to account for an exchange industry that consists of two MTFs and an historical exchange. Based on the observation that banks are both owners and clients of MTFs, we examine banks' incentive to influence the pricing policy of MTFs. We show that when brokerage and trading activities are particularly important for banks' revenue relative to their profit as MTF operators, certain market outcomes may emerge whereby both MTFs include banks' interest as clients in their objective function. We also demonstrate that accounting for banks' interest in MTFs' objective function acts as a competitive device that reduces the price and the profitability of the historical exchange.

INSTRUMENTY FINANSOWE NOTOWANE NA RYNKU ‘CATALYST’ – WYBRANE ZAGADNIENIA PRAWNE

The Financial Instruments Listed on the Catalyst Bond Market: Selected Legal Aspects Summary The Catalyst Bond Market, which was launched on 30 September 2009, comprises four trading platforms which operate on the transaction platforms of the Warsaw Stock Exchange and BondSpot. Two of them can be classified as multilateral trading facilities (MTF) (in the meaning of art. 3 point 2 of the Trading in Financial Instruments Act of 29 July 2005) and the other two are an off-exchange regulated market (in the meaning of art 15 paragraph 1 point 2 of the Trading in Financial Instruments Act of 29 July 2005). Although the name of this market may suggest otherwise, bonds are not the only subject of the market transactions on the Catalyst Bond Market. This simplification may be due to social communication and marketing requirements. Besides bonds issued by companies (corporate bonds) and co-operative banks (co-operative bonds), other kinds of debt securities are listed on this market (i.e. issued by mortgage banks, cities, or even the State Treasury). Thus it would be more accurate to call Catalyst an organised debt securities market. Debt securities can be much more attractive for an issuer than equity securities. The issuer may for some reason wish to discourage the buyer of securities from exercising his ownership rights, e.g. by voting at the shareholders’ general meeting. The aim of this article is to describe this kind of organised debt securities market from the legal perspective, taking into consideration the growth of the debt market in the modern economy.

Heterogeneous investors and trading platforms competition

Purpose – The purpose of this paper is to consider competition’s issues between European market firms, such as Euronext, and multilateral trading facilities, following Markets in Financial Instruments Directive’s enforcement. This new domestic competition is adding to the existing international competition among financial centers. While diversification of local trading services can improve the international competitiveness of a financial center, the fragmentation of order flows can harm its attractiveness. Design/methodology/approach – The theoretical setting analyzes the interaction between heterogeneous who experiment network externalities, and heterogeneous local trading services providers (alternative platforms and incumbent) in an international context. The authors compare two forms of organizations of the market: a consolidated market, and a fragmented market with alternative platforms – in both cases, in competition with a foreign universe. Findings – The results of this study point out the importance of the trade-off between diversification and externalities. With alternative platforms entry, enhanced competition decreases fees and redistributes informed investors between the foreign market and the domestic one. The increase of domestic platforms’ number then has more complex effects on externalities (of information and liquidity). When the liquidity externalities are low, the diversification of financial platforms increases the number of investors on domestic centers. When liquidity externalities are not negligible, despite the decrease of fees, this same diversification orientates more informed investors to the foreign center. Originality/value – This model is the first to analyze jointly the internal and international competition of trading platforms with heterogeneous investors.

IPOS and the Italian Financial Transaction Tax

The Italian Financial Transaction Tax introduced by the 2013 Stability Law applies in general to transfers of the ownership of shares. However, exclusions from taxation and tax debenture reduction are provided for transactions that take place in regulated markets and in multilateral trading facilities, with the clear aim of favouring development of these trading venues. Regarding initial public offerings, it may be observed that an offer for the subscription of newly issued shares in the primary market is not subject to the Italian Financial Transaction Tax (IFTT) while an explicit exclusion is not clearly stated by the regulatory framework in respect to an offer for the sale of existing shares on the secondary market. In this article, the authors analyse the latter issue.