Post-MiFID Developments in Equity Market Liquidity

Based on two samples of non-financial large caps from the FTSE 100 and the CAC 40 and a third sample of non-financial mid caps from the SBF 120, this study looks at four monthly periods to compare market liquidity before and after the entry into effect of MiFID. Over the last monthly period, i.e. September 2009, order-flow fragmentation reached substantial levels in all three samples, although it was less pronounced among the mid caps of the SBF 120. Between 20% and 25% of total volumes on the FTSE 100 and the CAC 40 were traded OTC or internalised. As regards non-internalised regulated order flow, 25% to 30% of volumes in large caps were executed on MTFs outside the primary market, compared with around 17% for mid caps of the SBF 120. Despite the high levels of fragmentation, primary markets continue to dominate the European securities trading landscape, with market share of approximately 70% for regulated volumes in large caps and 80% for mid caps. The primary markets also have good relative price competitiveness. The rise in competition between trading venues has been accompanied by a significant decline in price spreads. This reduction in implicit transaction costs is relatively proportionate to the strength of competition, because it is more marked among large caps than among mid caps. The decline has take place at the cost of reduced depth at best limits. Several points temper this conclusion, however. First, trading volumes fell sharply between October 2007 and September 2009. Next, competition between trading systems combined with the rise of algorithmic trading have resulted in orders being more broken up, such that average transaction size has fallen even more steeply than depth at best limits. The frequency of trading and quote changes has also increased greatly. In such an environment, a static measurement of depth has drawbacks, because the frequency with which the depth is renewed is not captured. Also, the available depth appears to be divided between the most active platforms. Ultimately, increased competition has resulted in a decline in implicit transaction costs. The investors best placed to take advantage are logically those that operate on several platforms through smart order routing systems.