MIFID, French Equity Markets Fragmentation and Intraday Volatilities: A Network Analysis

Abstract

The implementation of the MiFID Directive in November 2007 results in the end of monopolies of European stock exchanges. Thus it introduces trades fragmentation: listed securities are no longer solely traded in the market which first listed them, but also in other stock exchanges or trading platforms. We propose an empirical study of the relationship between trades fragmentation and the intraday volatilities of the stocks of the CAC40 index, using a network analysis. The relationships between the volatilities of the stocks are measured by topological indicators from the econophysics literature, with three superiods: prior to the introduction of competition (2000/01-2007/11), during the transitory period of rising fragmentation (2007/12-2010/01), and after the stabilization (2010/02-2015/06). Fragmentation is measured by the reference index of FIDESSA. In accordance with the market microstructure literature stating that fragmentation affects volatility at the individual stock level, we show that fragmentation also affects the structure of the system. In particular, the intraday volatilities of the stocks of the CAC40 are all the more connected to the rest of the network that their level of fragmentation is high and stable. In addition, financial stocks volatilites show both an increasing intra-sectoral integration and a decreasing inter-sectoral integration, which does not allow for straightforward bail-in recommendations as regards policy choices in the context of crises resolution.