Post MiFID II, dark trading should return to basics – Haoxiang Zhu and Carole Comerton-Forde

MIT Sloan Asst. Prof. Haoxiang Zhu

From Oxford Business Law Blog 

On January 3, 2018, the revised Markets in Financial Instruments Directive, or MiFID II, became effective across EU member states. This comprehensive and far-reaching regulation will shape European capital markets in years to come. Among other things, MiFID II puts several restrictions on dark pools in European equity markets: (i) Broker Crossing Networks are essentially banned; (ii) dark pools that rely on “reference prices” on exchanges can only execute trades at the midpoint of exchange best bid and offer; and (iii) dark pools are subject to volume caps of 4% for a single venue and 8% across all dark pools (colloquially referred to as the double volume caps). On the other hand, MiFID II keeps the “Large in Scale” (LIS) waiver, so sufficiently large transactions can still go through without being counted toward, or affected by, the double volume caps.

Jargon and technical details aside, these MiFID II rules essentially push dark trading to return to basics: the matching of large institutional orders to reduce price impact (for both sides). Price impact—the very act of buying or selling moves prices adversely—can be quite costly for institutional investors, especially in today’s market where alphas are hard to generate and high-frequency traders watch every market movement at the microsecond level. By reducing the price impact of trades, investors enhance returns. Read More »

How financial regulation of public companies can negatively impact nonpublic entities – Andrew Sutherland

Andrew Sutherland

MIT Sloan Assistant Professor Andrew Sutherland

The passage of Sarbanes-Oxley (SOX) was big news for public companies, but there was little discussion or analysis about what it meant for private firms, nonprofits and governmental entities. Yet those nonpublic entities needed to purchase accounting services from the same pool of independent auditors. It turns out that shocks to public companies from SOX significantly affected supply for the entire audit services market.

In a recent study, my colleagues and I looked at these developments and found that SOX had several negative spillover effects for nonpublic entities. Overall, audit fee increases for nonpublic entities more than doubled. Many others were forced to switch to a different auditor.

Why is this a big deal if those groups aren’t legally required to hire independent auditors? It’s important because nonpublic entities still have substantial financial reporting needs. For example, organizations use audits to establish payments plans with vendors and suppliers or to demonstrate creditworthiness to banks. Charities use audits to show they are responsibly spending donors’ money.

Here is a breakdown of the spillover effects: Read More »

In support of transparent financial benchmarks — Darrell Duffie , Piotr Dworczak, Haoxiang Zhu

MIT Sloan Asst. Prof. Haoxiang Zhu

From Vox, CEPR’s Policy Portal

Benchmarks are heavily wired into modern financial markets. For example, trillions of dollars in bank loans and several hundred trillion dollars (notional) of derivatives transactions depend on daily announcements of LIBOR. The WM/Reuters foreign exchange fixings dominate the currency markets, in which there are over $5 trillion of transactions per day. Benchmarks are the basis for trade of a wide range of commodities such as gold, silver, oil, and natural gas. They have also been the focus of scandals (Brousseau et al. 2013).

Read More »