Essays on Market Microstructure

This dissertation is a collection of three distinct papers contributing to the ongoing literature debate on financial market microstructure, specifically focusing on transaction costs and market liquidity. The research explores the impact of two regulatory frameworks and one methodology revision on different markets: equity, options and foreign exchange. The first paper investigates the effects of the Markets in Financial Instruments Directive II (MiFID II) on European equity markets. By analysing high-frequency trading data from the London Stock Exchange, the study provides empirical evidence that the directive has reduced implicit transaction costs, thereby improving market quality. This paper adds to the ongoing discussion about regulatory reforms and their implications for market efficiency. The second paper examines the revised methodology of the WM/Refinitiv (WM/R) 4 pm fix for FX benchmark rates, introduced in 2015 and currently at the centre of the debate in the industry for a potential further revision. Using proprietary high-frequency data from Refinitiv, the study assesses the representativeness, attainability, and robustness of the WMR benchmark, analysing new market dynamics. By studying several liquidity and transaction cost metrics, the analysis finds that although certain enhancements, such as extending the calculation window could marginally improve robustness; the current methodology design still delivers a more effective benchmark. The third paper focuses on speed competition in modern financial markets, particularly within options trading. It evaluates the impact of the Passive Liquidity Protection (PLP) provision introduced by Eurex, designed to mitigate the negative effects of high-frequency trading. By analysing millisecond-level trading data for single-equity options, the findings reveal reduced average spreads across all instruments covered by the PLP provision. However, different liquidity profiles led to divergent outcomes in trading volumes and market depth. This paper contributes to the broader debate on the role of speed in trading environments and the potential benefits of regulatory interventions aimed at promoting fair and efficient markets. Through these three studies, the dissertation aims to provide a comprehensive analysis of how regulations and methodologies affect liquidity and transaction costs across different asset classes, offering valuable insights for policymakers, financial institutions, and investors.