AMF SEES UPTICK IN CERTAIN TRANSACTION COSTS.
The cost of small transactions on some of the most liquid securities has slightly increased following the implementation of MiFID II’s tick size regime, according to the Autorité des Marchés Financiers (AMF) which carried out analysis of the initial impact of the regime on just over 500 shares on Euronext Paris, including CAA40 stocks.
The French financial regulator found the effects of the tick size rules were positive overall with less messages to create noise in the market, higher traded volumes and an increased quantity available at best limits.
The study said, “It reveals a sharp increase in depth and a significant reduction in the number of messages sent to the market, at the cost, however, of a widening of the spread for the most liquid securities.”
“The outcome for market participants is a slight additional cost that is offset by the benefits of noise reduction and the increase in the quantity available at the best limits. For small caps, implementing appropriate tick sizes…resulted in a more dynamic order book and, above all, a sharp increase in traded volumes.”
European regulators introduced a harmonised tick size regime under MiFID II. The aim was to end the race towards ever-smaller tick sizes that trading platforms in Europe had entered in order to gain market share since the original directive came into effect in November 2007. It proved to be a controversial move with certain market participants claiming it was put in place to control high-frequency trading (HFT) flow and activity.
The AMF’s study suggests the positive effects of the regime only concerns orders of non-HFT participants, with a decrease in market share seen across HFT firms. HFT market makers’ share of the depth and traded volumes dropped for securities with an increased tick size, compared to securities where the tick size remained the same.
The AMF said this suggests that increasing tick size allows more players to place orders at competitive prices in the order book, while HFT market makers fail to offset the competition of the other players at the best limits by gaining a better position in the queue.
However, the study should be put into context. It presents average magnitudes, by group of securities, and covers a period of very low volatility, so the results should be considered with caution. A more in-depth analysis, over a longer period may highlight the full effects of the new tick size regime.
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