Before the Markets in Financial Instruments Directive (MiFID I) was applied in 2007, exchanges were able to implement their own tick size without being concerned about competition, since trading was concentrated to the incumbent exchanges. The increased fragmentation and competition after the introduction of MiFID I in Europe started a race between the incumbent exchanges and alternative venues towards everfiner tick sizes in order to offer better prices and gain market share. Over the past few years, this trend has increased and caused adverse effects on the market quality. On March 3rd, 2018, MiFID II introduced a harmonized tick size regime that takes each stock's price and liquidity into account in order to address the negative impact of the \race to the bottom" that began with MiFID I.
The aim of this bachelor thesis is to investigate whether the introduction of the MiFID II tick size regime has achieved its desired effect of positively impacting the European equity market quality. Therefore, I will study and summarize the existing literature about the general effect of tick size changes on security markets, whereby I distinguish between tick size changes that are caused by changes in tick size rules and price movements. Furthermore, I will introduce the main concepts of the new regulatory framework Markets in Financial Instruments Directive II / Markets in Financial Instruments Regulation (MiFID II/MiFIR) with a focus on the new tick size regime and its consequences for the European market. The core of this paper is the empirical study on the effects of tick size changes brought about by MiFID II's tick size regime on market quality, using data from the German home market Xetra. I will first investigate the overall impact of the regime on the most frequently traded stocks listed on Xetra by observing different measures of liquidity, such as transaction costs, market depth, trading volumes and price volatility. In addition, I provide separate results for the different effects of decreases and increases in tick size. Secondly, I examine the impact of the new regulatory framework and its tick size regime on the market share redistribution in Europe. This allows to determine whether the contentious exemption of systematic internalisers from the regime creates an unfair advantage at the expense of regulated markets.
Table of Contents
1 Introduction
2 Background Information
2.1 Tick Sizes
2.2 Trading Process
2.3 Price-Time Priority
2.4 Measures of Liquidity
3 Literature Review
3.1 Impact of Tick Sizes
3.1.1 Changes in Tick Size Rules
3.1.2 Price Movements
3.1.3 Fundamental Impact
4 Changes Brought About By MiFID II
4.1 Tick Size Regime as defined in Article 49
4.2 Changes on the German Equity Market
4.3 Implication for the European Equity Market
5 Empirical Design
5.1 Sample & Data
5.2 Methodology
5.3 Analyzed Parameters
6 Empirical Results
6.1 Impact on Liquidity
6.1.1 Bid-Ask Spread
6.1.2 Order Book Depth
6.1.3 Turnover
6.1.4 Price Volatility
6.2 Impact on Market Shares
6.2.1 Market Share Distribution
6.2.2 Influence of the Regime
7 Discussion
8 Conclusion
Research Objectives and Topics
This bachelor thesis investigates whether the harmonized tick size regime introduced by MiFID II has successfully improved European equity market quality, specifically examining liquidity, order book noise, and market share redistribution on the German Xetra market using a difference-in-differences approach.
- The impact of regulated tick sizes on market liquidity and transaction costs.
- Empirical analysis of bid-ask spreads, order book depth, and trading turnover.
- The influence of regulatory changes on European market share distribution.
- Potential competitive advantages of systematic internalisers (SIs) under the new framework.
- Evaluation of price volatility and order book noise changes following regulatory intervention.
Excerpt from the Book
1 Introduction
Before the Markets in Financial Instruments Directive (MiFID I) was applied in 2007, exchanges were able to implement their own tick size without being concerned about competition, since trading was concentrated to the incumbent exchanges. The increased fragmentation and competition after the introduction of MiFID I in Europe started a race between the incumbent exchanges and alternative venues towards ever-finer tick sizes in order to offer better prices and gain market share. Over the past few years, this trend has increased and caused adverse effects on the market quality. On March 3rd, 2018, MiFID II introduced a harmonized tick size regime that takes each stock’s price and liquidity into account in order to address the negative impact of the “race to the bottom” that began with MiFID I.
The tick size describes the minimum permissible price variation on a stock’s price. Nearly all stock markets around the world have introduced rules on their tick sizes with different variations of tick structures. For instance, prior to the introduction of the MiFID II regime, European markets generally used a stepwise tick system in which the tick size varied according to the price of the stock. Tick sizes play an important role in the trading process and have a direct influence on liquidity and the price formation process in a market. Harris (1994) suggests that if the tick size is too high, it would act as a binding constraint on the bid-ask spread and thus impose transaction costs on investors that are too high. On the other hand, Harris notes that setting the tick size too low may reduce the incentives for liquidity providers to submit orders and makes it easier to jump priority.
Summary of Chapters
1 Introduction: Provides an overview of the regulatory background and states the research goals regarding the impact of the MiFID II tick size regime.
2 Background Information: Defines fundamental market concepts, including tick sizes, the trading process, and standard measures of liquidity.
3 Literature Review: Summarizes existing academic research on how tick size rules and price movements affect market quality and liquidity.
4 Changes Brought About By MiFID II: Introduces the new regulatory requirements of MiFID II/MiFIR and describes the resulting changes for the German and broader European equity markets.
5 Empirical Design: Outlines the data, variables, and the difference-in-differences methodology used for the empirical analysis of market liquidity and shares.
6 Empirical Results: Presents the findings regarding the impact of the new regime on bid-ask spreads, order book depth, turnover, price volatility, and market shares.
7 Discussion: Interprets the findings in the context of existing literature and evaluates the overall effectiveness of the regulatory intervention.
8 Conclusion: Summarizes the study’s contributions and suggests that the new regime has not achieved its desired positive impact on overall market quality.
Keywords
MiFID II, Tick Size Regime, Market Quality, Equity Trading, Liquidity, Bid-Ask Spread, Xetra, Market Fragmentation, Systematic Internalisers, Order Book Depth, Transaction Costs, Financial Regulation, Market Share, Price Volatility, Trading Turnover.
Frequently Asked Questions
What is the core focus of this thesis?
The thesis examines whether the harmonized tick size regime introduced by MiFID II in 2018 achieved its goal of improving market quality in Europe, particularly within the German equity market.
What are the central research areas?
The research analyzes key liquidity measures, including bid-ask spreads, order book depth, turnover, and price volatility, while also investigating shifts in European market share.
What is the primary objective of the study?
The primary aim is to determine if the regulation has successfully countered the "race to the bottom" regarding tick sizes and whether it has positively or negatively impacted trading quality.
Which scientific methodology is employed?
The author utilizes a difference-in-differences (DiD) approach to isolate the impact of the regulatory treatment on stocks affected by the new tick size regime compared to a control group.
What does the main part cover?
The main part includes a literature review of market microstructure theory, a detailed description of the MiFID II regulatory framework, and an empirical analysis using intraday data from Xetra.
Which keywords define this work?
Key terms include MiFID II, tick size, market liquidity, bid-ask spread, order book depth, and systematic internalisers.
How do systematic internalisers (SIs) gain an advantage?
The study indicates that SIs benefit from an exemption from the strict tick size regime, allowing them to offer more granular price improvements and attract order flow from regulated markets.
What is the overall conclusion regarding market quality?
The author concludes that the new regime has largely failed to improve market quality, finding that it often leads to wider bid-ask spreads and reduced market depth for many stocks.
- Citar trabajo
- Daniel Fritzler (Autor), 2018, The MiFID II Tick Size Regime. Impact on European Equities Trading, Múnich, GRIN Verlag, https://www.grin.com/document/454190
