MULTI-MARKET TRADING AND MARKET LIQUIDITY: THE POST-MIFID PICTURE

Transcription

1 2010 Scientific Advisory Board Conference How Should Regulators Address Changes in Equy Markets? MULTI-MARKET TRADING AND MARKET LIQUIDITY: THE POST-MIFID PICTURE Carole Gresse, Universé Paris-Dauphine Disclaimer: The opinions expressed here are the views of the author and do not necessarily reflect the views and opinions of the AMF.

2 Topic and Objectives MiFID implementation on 1 November 2007 Rise of competion between trading venues RMs / MTFs / SIs Best execution duties Pre-trade and post-trade transparency obligations Trade reporting facilies (TRFs): BOAT, LSE European Trade Reporting Service, Reuters etc. Issues How much is the order flow fragmented between marketplaces? How has liquidy changed? Spreads Best-lim quote depth

3 The Market for Markets Main Regulated Markets LSE-Borsa Italiana / NYSE-Euronext / Deutsche Boerse MTFs Chi-X (Instinet) o Started trading in FTSE 100 securies in July 2007 o Started trading in CAC 40 securies in October 2007 o Extended trading to mid caps progressively from late August 2008 Turquoise (Investment banks & LSE), started on 22 September 2008 Nasdaq OMX Europe (Nasdaq OMX), started on 1 October 2008 closed on 21 May 2010 BATS Europe (BATS inc.), started on 31 October 2008 NYSE Arca Europe (NYSE-Euronext), 9 March 2009 Xetra International Market (DB), 2 November 2009 Dark pools: Chi-X Delta, POSIT (ITG Europe) OTC trading and internalization

4 Observation periods and sample July 2007 Chi-X for FTSE 100 Oct Chi-X for CAC 40 Aug Chi-X starts ext. to mid caps Sep Turquoise launch Oct BATS Europe Nasdaq OMX Europe launch Oct Benchmark period Jan Increasing fragment. High volatily June 2009 Fragment. > Jan.2009 Volatily still >2007 Sep Fragment. = June 2009 Volatily closer to 2007 FTSE 100: 51 securies CAC 40: 32 securies Other SBF 120 components: 57 securies Stocks of the financial sector excluded

5 Data Provided by IFS (Intelligent Financial Systems) Data flow originating from Euronext, LSE, DB, Chi-X, Turquoise, Nasdaq OMX Eur. (Neuro), BATS Europe, PLUS, & BOAT Quote data Bid and ask quotes every second as displayed in the OB of o Euronext, SETS (LSE), Xetra (DB), o Chi-X, Turquoise, Nasdaq OMX Eur., BATS Europe, o and on the PLUS quote-driven platform Trade data All transactions executed on o Euronext, the LSE (in the OB and off the OB), DB, o Chi-X, Turquoise, Nasdaq OMX Eur., BATS Europe, PLUS Trades reported to BOAT and the LSE European Reporting

6 Market fragmentation in September 2009 FTSE 100 Stats include batch auction trading, continuous trading, and internalized trading. CAC 40 SBF 120 mid caps

7 Rise in market competion between RMs and MTFs across observation periods FTSE 100 CAC 40 SBF 120 mid caps

8 Liquidy measures Spreads Average quoted spreads: (Ask Bid ) / Mid o Locally in a given market o Global: consolidated across markets by comparing the highest bid quote of all markets wh the lowest ask quote of all markets o Sample mean: market-value weighted Average effective spreads: 2(Price Mid ) / Mid o Local: average over the transactions of a given market Depth o Global: average over the transactions of all markets o Calculated wh the cross-market mid o Trade-size weighted average per stock / Market-value weighted mean per sample Displayed quanties associated wh the best lim quotes (in K ) o Local or global by summing the quanties of all markets quoting the best lim price o Sample mean: market-value weighted

9 Fragmentation measure Fragmentation index Reciprocical of the Herfindahl concentration index FI = ( ) 2 market share in 1 trading volumes If perfect concentration => FI = 1 If N markets wh equal market shares: FI = N 1 ( ) 1 N 2 = N

10 Changes in liquidy FTSE 100 CAC 40 SBF 120 (mid caps) Volumes in billion Fragmentation index Index return volatily Cross-sectional average return volatily

11 Changes in liquidy cont d FTSE 100 CAC 40 SBF 120 (mid caps) Average quoted spreads (in bp) Global Local on primary market Average effective spreads (in bp) OB trades only Global Local on primary market

12 Changes in liquidy cont d Depth in K Trade size in K Depth divided by trade size FTSE 100 CAC 40 SBF 120 (mid caps)

13 Changes in liquidy Multivariate analysis PANEL REGRESSIONS Control variables Average spread or depth ( stock i, month t) = a volatily + a 1 + a 4 2 Jan a ln( volume) + a 5 3 June a ( 1/ price) 6 Sep α i + ε Month dummies Crosssection fixed effect Average spread Error term or depth ( stock i, month t) = b 1 volatily + b 2 ln( volume) + b + b 3 4 ( 1/ price) FI + α i + α t + η Fragmentation index Month fixed effect

14 Variables All FTSE 100 CAC 40 SBF 120 (mid caps) Global quoted spread Global effective spread Jan (ns) June *** Sep *** Jan (ns) June * Sep *** *** Increasing *** *** *** Increasing *** *** ** Increasing *** economic *** (ns) Increasing ** economic *** ** Increasing economic (ns) *** *** Increasing economic (ns) (ns) Increasing Less significant for mid caps Increasing Global quoted depth Jan *** June *** Sep *** *** Decreasing *** economic *** *** Decreasing *** economic *** *** Decreasing *** economic *** Decreasing economic Model wh the FI variable Spreads and depth significantly decrease wh FI over the whole sample By index: Correlation between depth and FI is not significant except for SBF 120 Correlation between spreads and FI are weakly significant except for SBF 120 Methodological issues

15 Changes in liquidy 2-stage analysis in the post-mifid periods (Jan., June, & Sep.2009) 1 ST STAGE FI = c ln( market 1 value) + c 2 ln( volume) + c + c 3 5 FTSE100 + c June c 4 SBF120 6 Sep γ Predicted fragmentation: PFI Unexpected fragmentation: UFI 2 ND STAGE: SEEMINGLY UNRELATED REGRESSIONS Quoted spread = ( control variables) + d 1 PFI + d 2 UFI + d 3 OTCshare + ν QS Effective spread = ( control variables) + e 1 PFI + e 2 UFI + e 3 OTCshare + ν ES Depth = ( control variables) + f 1 PFI + f 2 UFI + f 3 OTCshare + ν D

16 Changes in liquidy 2nd-stage SUR results Variables All FTSE 100 CAC 40 SBF 120 (mid caps) PFI *** *** *** *** Global quoted spread UFI *** *** (ns) (ns) OTC *** (ns) (ns) (ns) PFI *** *** ** ** Global effective spread UFI *** *** (ns) * OTC *** (ns) (ns) (ns) PFI *** *** (ns) (ns) Global quoted depth UFI (ns) *** ** *** OTC (ns) ** (ns) (ns)

17 Changes in liquidy Time series analysis Methodology Daily averages of liquidy measures and daily fragmentation index (FI) from 1 Sep. to 30 Nov stage analysis Results o 1 st stage: Regression of FI on liquidy determinants o 2 nd stage: Panel regressions of liquidy variables on o PFI (endogenous fragmentation) o UFI (exogenous fragmentation), o Share of OTC & internalized trading Spreads negatively relates to fragmentation Depth posively relates to fragmentation More significant for FTSE 100 stocks Not significant for SBF 120 mid caps

18 Conclusions End of 2009: substantial fragmentation but primary exchanges still dominant players 3 MTFs wh significant market shares Chi-X for all securies BATS Europe more specifically on large UK equies Turquoise more specifically on Euronext large equies No evidence that order flow fragmentation between trading platforms harms liquidy Spreads have decreased between Oct and Sep in proportion wh the level of market competion o More significant after June 2009 o More significant for FTSE 100 stocks/ Less or no significant for SBF 120 mid caps Depth and trade size declined dramatically between Oct and Sep o More significant in Jan and less pronounced afterward o Trade size decreased more than depth o Not only driven by fragmentation, other explaining factors o When focusing on 2009 data, depth posively related to fragmentation

19 Conclusions cont d Caveats Depth measure o Best lim quotes only o Static observation every second, no measure of the frequency of refreshment Correlation analysis, not causaly Potential issues to investigate Explic trading costs / Clearing costs? Intraday volatily / Price discovery? Reference prices