The effects of the implementation of MiFID on stock liquidity

Abstract

The purpose of this thesis is to investigate the effect of the Markets in Financial Instruments Directive (MiFID) on stock liquidity for the Norwegian equity market. Our objective is to find out whether the implementation of MiFID has had an effect on stock liquidity, and if it has, we seek to research whether this effect has been positive (increased liquidity) or negative (decreased liquidity). MiFID abolished the “concentration rule” and allowed for trading on alternative trading venues, introducing market fragmentation in the Norwegian equity market. Our research focuses on the OBX index, which includes the 25 most liquid stocks on the Oslo Stock Exchange, in the period of 2006 - 2017. We employ the methodology presented by Gresse (2011) where we utilize the panel regression method to study the effects of competition and market fragmentation on stock liquidity as measured by the bid – ask spread. In the regression we include trading volume, stock price and return volatility as control variables, and use binary time variables to study the effects of different levels of market fragmentation on liquidity. We find that there is a significant effect of MiFID on stock liquidity. Our results show a positive effect on stock liquidity following the introduction of MiFID, as demonstrated by a decrease in bid-ask spreads.