Market Evolution – Post MiFID

European Capital Markets Institute (ECMI) made an interesting presentation on how the Financial Markets have evolved since the introduction of the Market in Financial Instruments Directive (MiFID).

The pan European MiFID directive was introduced on 1st November 2007 and had a profound, long term impact on the Securities market.

It saw banks operating as exchanges, the decentralisation of execution venues as well as introducing longer term strategic opportunities for nimble and innovative technology players to compete with the exchanges.

Exchange Impact
Some interesting facts have emerged on how the exchanges have been impacted post MiFID. The following table details the trading volumes and turn over from the London Stock Exchange (LSE) :

Trades       Turnover
2008    2.22 million      €24.04 billion
2009    2.17 million      €14.29 billion

Trading turnover was down by almost half in 2008 – 2009, whilst trading volumes remained constant.

During this period, the LSE has lost market share down from 35% to 24%. The primary benefactor has been Chi X which has seen its market share grow in only a few years to 12%.

The is mirrored across the Atlantic, where the NYSE has lost market share down from 60% in 2003 to 27% today.

New Entrants
The new entrants ushered in by MiFID, such as the MTFs (multi lateral trading facilities) , crossing networks and dark pools, have turned the conventional exchange model on its head.

The exchanges are struggling to control their cost base while at the same time increased competition has reduced trading fees and pushed down tick sizes.

In addition, MiFID failed on one of its primary objective to deliver best execution. With the evolution of the virtual exchanges ( such as MTFs), price transparency has deteriorated and had driven liquidity away from the lit venues and onto the dark venues such as dark pools and crossing networks.

Unique Challenges
There are still a number of unique challenges that the regulators need to overcome in order to balance the need for strict regulation against the need to maintain a liquid and efficient market place.

In today’s global markets, if the regulatory response is fragmented by jurisdiction, political administration or geography, such as a divergence of EU and US regulation, this will only drive further liquidity onto the unlit and fragmented venues and will truly leave the legacy exchanges to be a shadow of their former glory.

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