Mifid – the supremacy of fragmented markets

On 1st November 2007, the Markets in Financial Instruments Directive came into force. The main objectives of the Directive were to increase competition and consumer protection in investment services.

This EU legislation directly targeted Stock Exchange monopolies and allowed firms to independently publish pre and post trade data for European liquid shares. As a result, various outlets have emerged which offer competing venues for the publication of such information including Markit Boat and Chi-X. This has encouraged price competition and driven down prices, allowing new entrants to quickly build up market share from undercutting the Exchanges, for whom market data has been a key revenue.

Revenues arise from charging firms to publish the data and also charging for people to see the same data in real-time.

Ordinarily, market fragmentation would be harmful as it would increase search costs (need to look in multiple places). However, just as technology enabled the move away from “floor” based (“face to face”) trading to screen based trading, so fragmented information can be instantly consolidated from multiple markets and re-assembled as a “virtual market”. Firms such as Reuters have been able to offer new services to do exactly this.

In this environment, Exchanges have found their market data prices under intense pressure – publishers seek out the cheapest publishing venue, and consumers challenge the price of their data feeds from Exchanges which contain less comprehensive views of market activity.

Consequently, whilst the trend of consolidation amongst Exchanges might have suggested a strengthening of their role and a deepening of the liquidity they offer, it may be more accurately viewed as a defensive play with their primacy likely to decline thanks to technology.

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