AN EMPIRICAL MODEL OF MULTI-VENUE TRADING COMPETITION POST-MiFID

The Market in Financial Instruments Directive (MiFID) aims to increase com-petition and to foster client protection in the European \u85nancial market. Among other provisions, it abolishes the concentration rule and challenges the market power of existing trading venues. The directive introduces venue competition in order to achieve better execution and ultimately lower trading costs. In this paper I address the question of whether fostering competition between alternative trading venues alone may or not be able to impact actual competition in the market. I consider two reasons for why it may not: cash trading exhibits direct network e¤ects and the typical trading and post-trading bundling in the EU. I then propose an empiri-cal framework to evaluate the actual degree of competition between trading venues. This empirical approach constitutes, for the best of my knowledge, one of the \u85rst attempts to structurally model \u85nancial trading, which is instrumental for mea-suring empirically the impact of network e¤ects and of the bundle of trading and post-trading services as barriers to competition. This evaluation is provided in the companion paper, Ribeiro (2008)