Economic impact assessments on MiFID II policy measures related to computer trading in financial markets

Economic impact assessments on MiFID II policy measures related to computer trading in financial markets
Document type
Working Paper
Author(s)
Linton, Oliver; O'Hara, Maureen; Zigrand, Jean-Pierre
Publisher
BIS
Date of publication
31 August 2012
Subject(s)
Trends: economic, social and technology trends affecting business
Collection
Business and management
Material type
Reports

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A paper assesses the justification and likely effectiveness of measures proposed for the regulation of automated financial trading in the Markets in Financial Instruments Directive II. Measures covered are notification of algorithms, circuit breakers that halt trading on markets as a whole or in specific stocks in relation to wide swings of price, minimum tick sizes (the minimum increment of variation permitted in quoted or offered prices),  obligations to act as market makers, minimum resting times, and minimum order to execution ratio. Overall, there is general support from the evidence for the use of circuit breakers, particularly for those designed to limit periodic illiquidity induced by temporary imbalances in limit order books. There is also support for a coherent tick size policy across similar markets. The evidence offers less support for policies imposing market maker obligations or minimum resting times. The effectiveness of proposed measures to require notification of algorithms or minimum order-to-execution ratios are also not supported by the evidence. The proposed notification policy is too vague, and its implementation, even if feasible, would require excessive costs for both firms and regulators. An order-to-execution ratio is a blunt policy instrument to reduce excessive message traffic and cancellation rates. While it could potentially reduce undesirable manipulative trading strategies, beneficial strategies may also be curtailed.

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