MiFID Impact on Stock Exchange Competition: Regulatory Booster or Exaggeration?

1. MiFID – impact on the competition between the stock exchanges and other players Florian Vanekflorian.vanek@wienerborse.at

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 4 Internalizer 1 Internalizer 3 Internalizer 2 Internalizer Stock exchange A Stock exchange B Stock exchange C Stock exchanges MTF 2 MTFs MTF 4 MTF 1 MTF 3

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 Market 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 Stock Exchanges now Stock Exchanges after MiFID • 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) Regulated markets Regulated markets Unregulated markets Stock exchanges may operate MTFs

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. MTFs now MTFs after MiFID MiFID changes markets: MTFs 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: SystematicInternalizer and OTC trading SI and OTC after MiFID SI and OTC now • 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 Completely unregulated Subject to 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

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 !!!