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MiFID, Reg NMS and competition across trading venues in Europe and the USA

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  • Giovanni Petrella

Abstract

Purpose - The purpose of this paper is to evaluate how markets in financial instruments directive (MiFID) and regulation national market system (Reg NMS) affect the competition for order flow among trading venues in, respectively, Europe and the USA. Design/methodology/approach - The paper examines the differences between MiFID and Reg NMS and provides, based on market microstructure principles, insights as to their likely impact on European and the US securities markets. Findings - Although MiFID and Reg NMS share the common objective of enhancing competition in securities markets, they adopt different provisions with respect to three issues that strongly influence the competition for order flow among trading venues. Specifically, some of the provisions set forth by the US regulation with respect to the best execution duty, the consolidation of market data and the disclosure of execution quality information appear to be more effective, compared to the European Union ones, in strengthening competition for order flow among trading venues. Research limitations/implications - Regulatory factors can only partly explain the current structure of the European and US securities markets. Technology and heterogeneity in traders' demand are other important factors that concur in shaping the European and US markets. Practical implications - The degree of competition for order flow among trading venues depends on how regulations define the best execution duty, the availability of updated and consolidated pre‐trade (i.e. quotations) and post‐trade (i.e. transactions) information and the efficiency of post‐trading infrastructures. Originality/value - The paper addresses issues not yet investigated and provides valuable insights for financial intermediaries, incumbent and prospective exchanges as to the competition in the securities industry, and to regulators as to the likely impact of the new regulations.

Suggested Citation

  • Giovanni Petrella, 2010. "MiFID, Reg NMS and competition across trading venues in Europe and the USA," Journal of Financial Regulation and Compliance, Emerald Group Publishing Limited, vol. 18(3), pages 257-271, July.
    • Handle: RePEc:eme:jfrcpp:v:18:y:2010:i:3:p:257-271
    DOI: 10.1108/13581981011060826
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    References listed on IDEAS

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    1. Biais, Bruno & Glosten, Larry & Spatt, Chester S, 2002. "The Microstructure of Stock Markets," CEPR Discussion Papers 3288, C.E.P.R. Discussion Papers.
    2. Caglio, Cecilia & Mayhew, Stewart, 2016. "Equity trading and the allocation of market data revenue," Journal of Banking & Finance, Elsevier, vol. 62(C), pages 97-111.
    3. Bessembinder, Hendrik, 2003. "Trade Execution Costs and Market Quality after Decimalization," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 38(4), pages 747-777, December.
    4. Ekkehart Boehmer & Robert Jennings & Li Wei, 2007. "Public Disclosure and Private Decisions: Equity Market Execution Quality and Order Routing," Review of Financial Studies, Society for Financial Studies, vol. 20(2), pages 315-358.
    5. Lannoo, Karel, 2007. "MiFID and Reg NMS: A test-case for 'substituted compliance'?," ECMI Papers 1353, Centre for European Policy Studies.
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    Cited by:

    1. Carole Gresse, 2017. "Effects of Lit and Dark Market Fragmentation on Liquidity," Post-Print hal-01631771, HAL.
    2. Manuela Geranio, 2016. "Evolution of the Exchange Industry," Springer Books, Springer, number 978-3-319-21027-8, June.
    3. Peter Gomber & Satchit Sagade & Erik Theissen & Moritz Christian Weber & Christian Westheide, 2017. "Competition Between Equity Markets: A Review Of The Consolidation Versus Fragmentation Debate," Journal of Economic Surveys, Wiley Blackwell, vol. 31(3), pages 792-814, July.
    4. Carole Gresse, 2011. "Effects of Lit and Dark Market Fragmentation on Liquidity," Post-Print halshs-00641122, HAL.
    5. Paulo Pereira Silva, 2018. "Fragmentation and Market Quality: The Case of European Markets," De Economist, Springer, vol. 166(2), pages 179-206, June.
    6. Gresse, Carole, 2017. "Effects of lit and dark market fragmentation on liquidity," Journal of Financial Markets, Elsevier, vol. 35(C), pages 1-20.
    7. Pierre-Cyrille Hautcoeur & Amir Rezaee & Angelo Riva, 2023. "Competition between securities markets: stock exchange industry regulation in the Paris financial center at the turn of the twentieth century," Cliometrica, Springer;Cliometric Society (Association Francaise de Cliométrie), vol. 17(2), pages 261-299, May.
    8. Gomber, Peter & Nassauer, Frank, 2014. "Neuordnung der Finanzmärkte in Europa durch MiFID II/MiFIR," SAFE White Paper Series 20, Leibniz Institute for Financial Research SAFE.

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