Best execution and the impact of transaction costs on trading in European Equities

This diploma thesis forms the second part of a best execution analysis concerning securities cross-traded on several European stock exchanges. The first part of the analysis tries to elaborate the possibility of arbitrage situations or situations where cross-traded equities are bought at sub-optimal prices, but abstracting from all costs related to such trading against which arbitrage gainings would have to be offset. Therefore, this second part of the analysis aims at identifying the factors that impact on total execution costs, which is the incorporation of costs directly related to trading in the assessment of the profitability of arbitrage or trade-through situations. To achieve this aim, an abstract model for the costs along the transaction chains of five European securities platforms, XETRA in Germany, Euronext Paris S.A. (ENP) in France, Mercato Telematico Azianario (MTA) in Italy, SWX Europe (virt-x) (SE) and Chi-x (CX) will be developed in this study in order to assess if arbitrage and/or trade-through situations still hold after the incorporation of those costs. As a matter of fact, trading of securities in Europe has long been governed by individual regulations of the several member states of the European Union (EU). Therefore they resulted and still result in a multitude of systems used for dealing with securities trading and the successive steps necessary for the conclusion of trades. Hence, trading of cross-traded securities involves the transfer of securities bought on one trading system to another trading system. The costs of such a cross-system transfer will also be incorporated in the analysis of this study.