New TABB Research Tracks the Impact of Competition under MiFID in Major Index Stocks from 2005 to 2009

Competition under MiFID is evident in the decline of effective spreads in 60 European stocks across the FTSE 100, DAX 30 and CAC 40 indices over a four-year period, from September 2005 to September 2009. Based on new research from TABB Group tracking the impact of competition under MiFID, average effective spreads declined in 92% of the European equities measured and in some case, spreads have at least halved.

Miranda Mizen, a principal at TABB Group and author of the TABB Pinpoint report, “Effective Spreads in European Equities,” says competition under MiFID is alive and well evident in the decline of effective spreads over four years in European equities in terms of price differential. She adds that technology upgrades, competition, fragmentation, high frequency trading and tick size adjustments have all contributed to the spread decline. “Two distinct waves are seen, the first in the third quarter of 2007 due to improvements in technology, MiFID’s implementation, high-frequency trading and firms meeting MiFID’s best-execution requirements. There was a second wave in the same quarter a year later, 2008, as competition increased, tick sizes were reduced and algorithmic trading increased.”

Although declining markets have exaggerated the narrowing of spreads, she says, the competitive pressure has been maintained as the European markets recovered after the Lehman Bros. collapse and despite lower trading volumes.

According to Mizen, “It’s usually a close call amongst competing execution venues for the best effective spread, and this has kept the pressure on. At the end of the period measured, the lowest effective spreads are, for the most part, between Chi-X and BATS for UK stocks, and between Chi-X and the main market for CAC 40 and DAX 30 stocks.”

She notes, however, that the correlation between the effective spread and volatility and volume does become less evident as effective spreads narrow under the weight of MiFID competition.

The purpose of the study, part of a three-step process covering spreads, basis and value, was to document the trend of average effective spreads for each trade over a specific course of time, examining factors that affect the tightness of spreads across multiple venues as well as the cost of liquidity. Using stocks trading since September 2005, TABB used Reuters tick data from the primary market, Chi-X, Turquoise and BATS. Spreads were measured in terms of price differential and results incorporate the up/downward pressure on the spread caused by movement in the share price.

The new Pinpoint report with 11 charts is available now for download by TABB Group Equity Research Alliance clients and pre-qualified media at https://www.tabbgroup.com/Login.aspx. It is also available to all registered members of TabbFORUM, http://www.tabbforum.com, the online community “where capital markets speak”. For more information, visit http://www.tabbgroup.com or write to info@tabbgroup.com.

About TABB Group

TABB Group is the financial markets industry’s only research and strategic advisory firm focused exclusively on capital markets with offices in New York and London. Founded in 2003 and based on the proven interview-based research methodology of “first-person knowledge” developed by founder Larry Tabb, TABB Group analyzes and quantifies the investing value chain from the fiduciary, investment manager and broker, to exchange and custodian, helping senior business leaders gain a truer understanding of financial markets issues. In January 2010, TABB Group launched TabbFORUM,com, www.tabbforum.com, the online community where capital markets professionals share and contribute commentary on current issues. For more information, visit www.tabbgroup.com.