MiFID II tick size regime sees increase in certain transaction costs

The French financial regulator has found MiFID II’s tick size regime has widened the spread on certain transactions and impacted HFT market makers.

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 the French financial regulator.  

Autorité des Marchés Financiers (AMF) carried out the analysis of the initial impact of the regime on just over 500 shares on Euronext Paris, including CAA40 stocks.

It found the effects of the tick size rules were positive overall with less messages to create noise in the market, increased traded volumes and an increase in quantity available at best limits.

“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 analysis said.

“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 authorities introduced a harmonised tick size regime under MiFID II, although it proved to be controversial 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 decreased for securities with an increased tick size, compared to securities where the tick size where market share 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.