Competition among trading venues in Europe fostered by MiFID has resulted in the decline of spreads across key blue-chip indices, according to the latest research from consultancy firm TABB Group.
The TABB Pinpoint report, ‘Effective Spreads in European Equities’, tracked the spreads for 60 European stocks across the FTSE 100, DAX 30 and CAC 40 indices from September 2005 to September 2009, using Thomson Reuters tick data from the respective primary markets and multilateral trading facilities Chi-X Europe, Turquoise and BATS Europe.
The study found that average spreads declined in 92% of the equities measured, with spreads in some stocks reduced by half.
“It’s usually a close call amongst competing execution venues for the best effective spread, and this has kept the pressure on,” said Miranda Mizen, principal, TABB Group and author of the report. “At the end of the period measured, the lowest effective spreads are, for the most part, between Chi-X and BATS for UK stocks, and between Chi-X and the main market for CAC 40 and DAX 30 stocks.”
As well as trading venue competition, Mizen notes that technology upgrades, fragmentation, high frequency trading and tick size adjustments have all played a part to declining spreads.
“Two distinct waves are seen,” said Mizen. “The first in the third quarter of 2007 due to improvements in technology, MiFID’s implementation, high-frequency trading and firms meeting MiFID’s best-execution requirements. There was a second wave in the same quarter a year later, 2008, as competition increased, tick sizes were reduced and algorithmic trading increased.”
While declining trading volumes exaggerated the narrowing of spreads since the collapse of US investment bank Lehman Brothers, Mizen also notes that competitive pressure was maintained as the European markets recovered despite lower trading volumes.