Market transparency and dealer behavior: Lessons from MiFID II/MiFIR transparency requirements

This policy paper examines the effects of the introduction of the MiFID II / MiFIR framework on the transparency regime for sovereign bonds. The main purpose of the framework is to provide markets with real-time information and lower market asymmetries, thereby increasing liquidity in the market. Combining regulatory transaction data from BaFin with MTS limit order book data, we find contrasting results. While mandatory trade reporting had the desired effect in over-the-counter markets, as it narrowed spreads and improved liquidity, the MTS limit order book tells a different story. Once quotes and trades became generally public, dealers reacted by widening spreads and curtailing their quoting agressiveness which ultimately undermined liquidity and deteriorated price discovery. These findings have important consequences for further market integration efforts under the Savings and Investment Union umbrella. Policymakers must carefully consider the unintended consequences of desirable policy outcomes, such as market transparency, and should tailor policy solutions to venue type.