This study investigates the impact of MiFID II on the London Stock Exchange. We find that a tick-size reduction leads to lower bid–ask spreads, lower trade values, reduced cost of trading at and beyond the best bid-offer, an acceleration of quote updates, an increase in aggressive trades and a reduction in price impact. Increased tick size widens spreads and increases trading costs. Step functions reveal that liquidity adjusts opposite to the tick change. To determine if impacts are proportional, we identify potential functions that predict cost changes with tick updates, implying that traders adjust their trade sizes according to the new tick levels.
|Number of pages||41|
|Journal||European Financial Management|
|Early online date||12 Feb 2022|
|Publication status||Published - Jan 2023|
Bibliographical note© 2022 The Authors. European Financial Management published by John Wiley & Sons Ltd. Version archived for private and non-commercial use with the permission of the author/s and according to publisher conditions. For further rights please contact the publisher.
- MiFID II
- tick size
- trading cost