Effects of MiFID II on Stock Price Formation

Abstract

On January 3, 2018 MiFID II regulations came into effect. This paper compares properties of European stocks for 2017 and 2018. The introduced tick size regime impacted the microstructure in accordance with existing literature on tick size changes. Remarkably, the modification of the microstructure also impacted volatility and transacted volume. Furthermore, it is shown that closing auction volumes increased heavily since MiFID II, leading to higher absolute returns in the auctions.Before MiFID II, high closing auction returns reverted overnight, but after MiFID II this reversion disappeared, showing that closing prices became more efficient.JEL Codes: G10, G14, G15, G18, D44.

Heavy tailed distributions in closing auctions

“…In Europe nowadays around 30% of the daily volume is transacted in the closing auction, which makes the duration of the closing auction in trade time similar to approximately half a day of continuous trading 5 . 5 The fraction of daily transacted volume that is transacted in closing auctions has increased greatly over the past years, especially since the introduction of MiFID II, see Derksen et al (2020b). stocks in our sample.…”