MiFID II Explained: Key Regulations and Impact in the EU

Key takeaways

MiFID II is an EU regulatory framework in force since 2018 designed to increase transparency, strengthen investor protection, and standardize market practices across the bloc.
It broadens oversight to most asset classes and trading venues, including OTC trades and dark pools.
Major reforms include stricter transaction and pre-/post-trade transparency, unbundling of research costs, tighter rules on inducements, and increased scrutiny of algorithmic and high‑frequency trading (HFT).
Ongoing updates aim to introduce consolidated market data feeds, ban payment for order flow (PFOF), and require emergency trading measures.

What MiFID II covers and why it was introduced

MiFID II amends and expands the original Markets in Financial Instruments Directive (MiFID, 2007) to address gaps revealed by the global financial crisis. Whereas MiFID primarily focused on equities, MiFID II extends regulation to a wider range of instruments (stocks, bonds, derivatives, commodities, currencies) and to any firm accessing EU markets, regardless of where it is based. The goal is more consistent oversight, greater market transparency, and better protection for investors.

Main differences from the original MiFID

Scope: MiFID focused largely on equities; MiFID II covers virtually all securities and derivatives.
Coverage: MiFID II applies to firms and trading in EU-listed products even if the firm is non‑EU based.
Content: MiFID II contains more detailed rules (including on trading venues, transparency, reporting, and algorithmic trading).

Core regulatory changes and their impact

Regulated trading venues

Introduced Organized Trading Facilities (OTFs) to capture previously unregulated trading.
Multilateral Trading Facilities (MTFs) and regulated markets must meet stricter transparency and operational standards.
Dark pool activity is limited (caps on dark trading volumes) to shift more trading onto regulated venues.

Transparency and cost disclosure

Pre- and post-trade transparency obligations for regulated markets and MTFs require continuous publication of prices and trading data.
Research unbundling: brokers and fund managers must separate charges for research from execution fees so clients see explicit costs and can assess value. This aims to improve research quality and reduce hidden subsidization through trading commissions.

Investor protection and conflicts of interest

Inducements from third parties to investment firms or advisors are tightly restricted to reduce conflicts of interest.
Firms have a duty to act in clients’ best interests, including clear disclosure of commissions and fees.
Best execution rules require firms to take steps necessary to obtain the most favorable outcome for clients.

Reporting, recordkeeping, and supervision

Transaction reporting is required (detailed trade data submitted to regulators, generally by the following day).
Firms must retain records of communications and trading-related documentation to help detect market abuse.
Both sell-side firms and initiating counterparties have reporting obligations.

Algorithmic and high‑frequency trading

Greater scrutiny of algorithmic strategies: algorithms must be robust, tested, and designed to avoid market disruption.
Firms must keep records of algorithm testing and be able to demonstrate resilience under stressed conditions.
Market-making by algorithms is subject to obligations to provide continuous liquidity under formal arrangements.
A harmonized tick‑size regime and anti‑manipulation rules (e.g., prohibitions on quote stuffing) aim to level the playing field.

Dark pools

Dark pools are private trading venues that provide anonymity for large orders and can reduce market impact for institutional traders. MiFID II seeks to limit excessive use of dark pools to ensure fairness and transparency while retaining the ability to execute large trades with limited market impact.

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International and UK context

U.S. comparators

MiFID II’s closest U.S. counterparts include:
* The Securities Exchange Act of 1934 (established the SEC and broad oversight powers).
Regulation ATS (rules for alternative trading systems).
Regulation NMS (measures to improve market data access and trading fairness).

Brexit and the U.K.

After Brexit the U.K. initially carried much of MiFID II into domestic law to provide market continuity. Since then, U.K. policymakers have explored selective deregulation and reforms aimed at boosting competitiveness, but divergence has been cautious given the need to maintain market stability and global regulatory alignment.

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What’s next

Following mandated reviews, the EU has proposed and advanced changes to MiFID II, including:
* Consolidated data feeds (tapes) to aggregate prices and volumes across platforms.
A ban on payment for order flow (PFOF) to remove conflicts of interest in order routing (with transitional arrangements for some member states).
Mandatory emergency trading arrangements allowing markets to pause, limit, or correct trades under extreme volatility or unusual conditions.

Conclusion

MiFID II significantly reshaped EU financial markets by extending regulatory reach, increasing transparency, and tightening investor protections. Its rules on trading venues, cost disclosure, inducements, reporting, and algorithmic trading have required market participants to enhance compliance, governance, and operational systems. Ongoing refinements aim to further improve data access, eliminate certain conflicts of interest, and strengthen market resilience.