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Market Dominance and Barriers to Competition in Financial Trading Venues

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Abstract

The Market in Financial Instruments Directive (MiFID) aims to increase competition and to foster client protection in the European financial market. Among other provisions, it abolishes the concentration rule and challenges the market power of existing trading venues. The directive introduces venue competition in order to achieve better execution and ultimately lower trading costs. In this paper I address the question of whether fostering competition between alternative trading venues alone may or not be able to impact actual competition in the market. I consider two reasons for why it may not: direct network effects together with increasing returns to scale, and post-trading constraints. In particular, I (a) evaluate the actual degree of competition between trading venues, (b) measure the impact of network effects on competition, and lastly (c) assess the barriers to competition induced by post-trading constraints. The results imply that financial intermediaries tend to value liquidity more (than total fees) when deciding where to route a given order for execution - implying that being the incumbent venue translates into a competitive advantage. Furthermore, eliminating the mentioned barriers to competition seems to be associated with a significant decrease (of a similar magnitude) in the asymmetry of the industry.

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Bibliographic Info

Paper provided by NET Institute in its series Working Papers with number 08-35.

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Length: 33 pages
Date of creation: Oct 2008
Date of revision: Oct 2008
Handle: RePEc:net:wpaper:0835

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Related research

Keywords: Market Dominance; Network Effects; Financial Trading; Demand; Barriers to Competition;

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Cited by:
  1. Gomber, Peter & J├Ąger, Benedikt, 2014. "MiFID: Eine systematische Analyse der Zielerreichung," SAFE White Paper Series 14, Research Center SAFE - Sustainable Architecture for Finance in Europe, Goethe University Frankfurt.

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