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A study released today by the CFA Institute Centre for Financial Market Integrity, the policy arm of CFA Institute, has found no empirical evidence to suggest market fragmentation has had any material impact on the quality of the price formation process for equities traded under the Markets in Financial Instruments Directive (MiFID) regime. The study was undertaken to establish whether the proliferation of new trading platforms under MiFID has affected transparency, costs and price formation to the detriment of investors. The study will be used to support the CFA Institute Centre’s call for a consolidated system (or ‘tape’) for quote and trade data for European Equity Markets.
To complement the empirical analysis contained within the study, independent views of 962 investor users[1], drawn from a CFA Institute member survey, were incorporated to build a qualitative and quantitative picture on the impact of market fragmentation. The results highlight that market fragmentation has created mixed views amongst investor users, with their primary concern being the difficulty in obtaining a complete and clear picture of market prices.
The study identifies the following:- CFA Institute Centre finds no empirical evidence that fragmentation has been detrimental to the quality of the price-formation process.
- 70 percent of survey respondents concluded that dark pools are problematic for price discovery.
- 68 percent responded that market fragmentation has created difficulties in trade reporting obligations.
- The findings highlight the need for an accurate, complete, and clear picture of market prices. Investors should have fair access to such consolidated data.
- CFA Institute Centre recommends that European authorities pursue the implementation of a consolidated tape for quote and trade data for European equity markets. A consolidated tape would improve market transparency and best serve investors’ needs.
Study author Rhodri Preece, CFA, Director, Capital Markets Policy, said, “With the MiFID review scheduled for early next year, we wanted to establish the impact market fragmentation has had on investors. MiFID was designed to increase competition and create a level playing field in financial markets in Europe, and with exchanges losing as much as 20% market share to new platforms, we wanted to see if competition was having a positive or negative impact for investors. Our study suggests that there has been no detrimental impact on the price formation process, but fair and complete access to market prices remains a concern. It also highlights the difficulties in post-trade reporting in the fragmented marketplace. If these concerns are not addressed it could ultimately disadvantage large numbers of end-investors within the EU and conflict with the objectives of a fair and efficient market”.
Charles Cronin, CFA, Head of the CFA Institute Centre for Europe, Middle East, and Africa (EMEA), added, “The current crisis has highlighted the shortfalls that exist in transparency and regulatory control across capital markets. This report is therefore timely in highlighting to the EU Commission the need to harmonise trading and reporting obligations in the single market. A consolidated system or tape for pricing information would not only improve the quality of data for all stakeholders but also provide a level playing field for participants and help to facilitate best execution”.
The study can be downloaded for free from the CFA Institute Centre web pages at www.cfapubs.org/toc/ccb/2009/2009/13
