1. Wien, 22. September 2018
MiFID – impact on the competition between the stock exchanges and other players
Florian Vanek

2. MiFID – regulatory exaggeration or booster for new competition?
„Regulation is a double-edged sword. Get it right and it can tear down barriers. Get it wrong and it can be part of the problem.
(Source: Charlie McCreevy, European Commissioner for internal market and services)

3. Competition / new situation for stock exchanges in the field of...
Turnover in shares
Real time data selling
Stock exchange price might become less important
But compensation by providing data dissemination systems
Listing – does a regulated market with its severe requirements for issuers still make sense?

4. Agenda Horizontal and vertical competition in the market for markets
Regulatory environment created by MiFID
MiFID – New chances for MTFs and systematic internalizer?

5. Horizontal and vertical competition between market places
Internalizer 1
Internalizer 4
Internalizer
Internalizer 2
Internalizer 3
Stock
exchange A
Stock
exchange B
Stock
exchange C
Stock
exchanges
MTFs
MTF 1
MTF 2
MTF 3
MTF 4

6. Current situation Trading already deregulated in many EU countries
Stock exchange trading: supervised by financial market authorities, prices and turnover disseminated
OTC trading: lack of transparency, fragmentation of markets, liquidity splitted
Unequal competition between stock exchanges and OTC trading
Example from Austria: 30 % of the share trading volume turnover and 99 % of the bond trading volume turnover are OTC trades

7. Future situation Trading already deregulated in ALL EU countries
Pre trade transparency for all trading platforms (RM, MTF, SI)
Post trade transparency for all market participants (RM, MTF, SI, OTC)
Best exekution policy comprising all market participants
Due to MiFID competition between market places will take place on an equal basis

8. Mifid aims at increasing competition among markets, especially by
regulating MTFs and SI beside regulated markets
best exekution policy
TARGET:
Decrease in transaction costs
Increase in transparency

9. Agenda Horizontal and vertical competition in the market for markets
Regulatory environment created by MiFID
MiFID – New chances for MTFs and systematic internalizer?

10. MiFID defines the market for markets in a new way
Abuse
directive
MiFID
Prospectus
directive
Transparency
directive
Takeover
directive
Market places
Regulated
markets
MTFs
Systematic
Internaliser
OTC
trading
Transparency
Requirements +
Best exekution

11. MiFID changes markets: Stock exchanges
Exchanges now
Stock Exchanges
after MiFID
Regulated
markets
Regulated
markets
Unregulated
markets
Stock exchanges may
operate MTFs
Stock exchanges may operate MTFs, but some questions are open
Can we speak of „listing“ in an MTF? – Some investors need „listed“ securities and not just „traded“ securities“
Does the share price from an exchange operated MTF have the same quality an official stock exchange price?
Germany keeps its unregulated market „Freiverkehr“ in the law as a trade mark for the exchange operated MTF (more official position)

12. Vanishing of unregulated markets
Will a complete business break away for the stock exchanges?
Profit for certain issuers
Easy listing requirements: No prospectus, limited ongoing disclosure, no IFRS accounting – ideal for start ups and certain bonds
(e.g. Austrian unregulated market: 24 shares, 10 other equity instruments and more than 1000 bonds are listed)
Profit for certain investors
Official stock exchange price for valuation
Unregulated market meets the investment requirments for certain investors (internal or legal requirements) who need a listing on an organised market

13. MiFID changes markets: MTFs
MTFs now
MTFs after MiFID
Completely
unregulated
Subject to national law
according to MiFID
Main stipulations concering MTFs
Operated either by an investment firm or by a stock exchange
Licence by the financial market authority obligatory
Have to fix trading rules and rules concerning participating in trading
Surveillance of trades in order to identify market abuse and violation of trading rules
Information and support of the authority in case of market abuse
Clearing
Disclosure of information on trading participants as well as on traded securities
Pre and post trade transparency

14. MiFID changes markets: Systematic Internalizer and OTC trading
SI and OTC now
SI and OTC after MiFID
Completely
unregulated
Subject to transparency
Main stipulations concering SI
Have to fix rules concerning the access to their quote offers
Have to carry out trades at their quotes
Pre and post trade transparency
Main stipulations concering OTC trading
Post trade transparency

15. Agenda Horizontal and vertical competition in the market for markets
Regulatory environment created by MiFID
MiFID – New chances for MTFs and systematic internalizer?

16. Why MTFs have not been as successful in Europe till now as the ECNs (ECN = electronic connecting network) in the USA
Reason number 1: The „concentration rule“
The „concentration rule“ included in the Investment Service Directive (1993) empowers EU member states to prescribe order execution via the national stock exchange
Strong „concentration rule“ in France, Italy and Spain: Obligation to execute orders via stock exchange market access for MTFs not possible
Germany and Finland: prefer the stock exchange for all orders which are not routed to a specific market place market access for MTFs limited

17. Why MTFs have not been as successful in Europe as the ECNs (= electronic communication network) in the USA
Reason number 2: The market model
European stock exchanges introduced electronic order books and trading systems in the 1990ies before ECNs established in Europe
From the functional point of view the order driven exchanges in Europe were the first ECNs
„In Europe, exchanges have had to compete and innovate much more than in the US, where Nasdaq and the New York Stock Exchange are still the dominant Brands. This will prevent the growth of ECNs in Europe.“ (Bradley Hunt, Instinet‘s marketing director in Europe, Instinet is US trading platform)

18. New trading systems and market places in Europe for share trading since 2000
2001
2002
2003
2004 RM
Jiway
Nasdaq Europe
Nasdaq Deutschland
SETSmm
Xetra Best
Virt-x
ECN
Liquidnet
E-Crossnet
Posit

19. Will MiFID enhance the chance of MTFs / SI to succeed?
From the regulatory point MiFID generates an attractive environment for MTFs / SI
Regarding the structure and history of European securities markets (many new trading platforms failed) MTFs / SI are not likely to gain a large market share soon
One fact will be accelerated by MiFID: Co-operation and merger between stock exchanges in order to stay competitive (transaction fees, common trading platforms to realize economies of scale)

20. Estimated economic advantage of internalisation for a large broker
EUR per EUR 5000 trade
Pre-MiFID
Post-MiFID
4-6
2-4
+ 2-4 2
Saving stock exchange transaction fees
Revenues from spreads
Development costs
Total effect
Source: J.P. Morgan & McKinsey (2002)

21. Current alternative trading system projects
Source: University of Frankfurt

22. Everything clear? Fit for lunch?
Thank you for your attention !!!