The Possible Effect of Markets in Financial Instruments Directive 2 on High Frequency Trading
Seitsonen, Jami (2018)
Tampereen ammattikorkeakoulu
2018
Creative Commons Attribution 1.0 Suomi
Julkaisun pysyvä osoite on
https://urn.fi/URN:NBN:fi:amk-2018121321477
https://urn.fi/URN:NBN:fi:amk-2018121321477
Tiivistelmä
This paper analyzed the possible impact of Markets in Financial Instruments Directive 2 on high frequency trading firms based on a theoretical study. In order to achieve this, the paper introduced the general concepts of high frequency trading, its potential market impact and methods applied by high frequency trading firms. Soon after, the paper examined the new regulation, focusing on the legislation concerning high frequency trading. These two parts created the foundation for the third part of the paper, which focused on the organizational changes the new regulation will require high frequency trading firms to adopt, how it affects their market access, how MiFID 2 affects the trading venue selection of these firms and how it influences the profitability of different trading strategies of these firms.
Main findings of the paper were that MiFID 2 will have a negative impact on organizational flexibility and create additional expenses for high frequency trading firms in form of additional personnel expenses, which are the result of the new organizational requirements. This will create increased income expectations for the trading desks, slow down the implementation of new strategies and make the organizational structures of these firms more reminiscent of each other.
Furthermore, MiFID 2 will drive high frequency trading activities towards Regulated Markets and Multilateral Trading Facilities, due to restricted dark trading. New multi-lateral trading platforms, known as Organized Trading Facilities will also attract high frequency trading activity but in a lesser extent as these venues offer less liquid financial instruments for trading.
Finally, MiFID 2 will benefit high frequency trading firms practising in market making, as the increased tick sizes will benefit them. On the contrary, some opportunistic trading strategies are penalized due to the new order to transaction ratio and harmonized tick sizes.
Market access does not face significant revisions. Access providers are required to be non-discriminatory and offer transparent fee structures. The more even playing field will diminish the advantage that bigger high frequency trading firms have enjoyed and transparent fee structures will help the firms to plan their finances with more granularity.
Main findings of the paper were that MiFID 2 will have a negative impact on organizational flexibility and create additional expenses for high frequency trading firms in form of additional personnel expenses, which are the result of the new organizational requirements. This will create increased income expectations for the trading desks, slow down the implementation of new strategies and make the organizational structures of these firms more reminiscent of each other.
Furthermore, MiFID 2 will drive high frequency trading activities towards Regulated Markets and Multilateral Trading Facilities, due to restricted dark trading. New multi-lateral trading platforms, known as Organized Trading Facilities will also attract high frequency trading activity but in a lesser extent as these venues offer less liquid financial instruments for trading.
Finally, MiFID 2 will benefit high frequency trading firms practising in market making, as the increased tick sizes will benefit them. On the contrary, some opportunistic trading strategies are penalized due to the new order to transaction ratio and harmonized tick sizes.
Market access does not face significant revisions. Access providers are required to be non-discriminatory and offer transparent fee structures. The more even playing field will diminish the advantage that bigger high frequency trading firms have enjoyed and transparent fee structures will help the firms to plan their finances with more granularity.