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 concerningsecurities cross-traded on several European stock exchanges. The first part ofthe analysis tries to elaborate the possibility of arbitrage situations or situationswhere cross-traded equities are bought at sub-optimal prices, but abstractingfrom all costs related to such trading against which arbitrage gainings wouldhave to be offset. Therefore, this second part of the analysis aims at identifyingthe factors that impact on total execution costs, which is the incorporationof costs directly related to trading in the assessment of the profitability of arbitrageor trade-through situations. To achieve this aim, an abstract model forthe costs along the transaction chains of five European securities platforms, XETRAin Germany, Euronext Paris S.A. (ENP) in France, Mercato TelematicoAzianario (MTA) in Italy, SWX Europe (virt-x) (SE) and Chi-x (CX) will bedeveloped in this study in order to assess if arbitrage and/or trade-through situationsstill hold after the incorporation of those costs. As a matter of fact, tradingof securities in Europe has long been governed by individual regulations of theseveral member states of the European Union (EU). Therefore they resulted andstill result in a multitude of systems used for dealing with securities trading andthe successive steps necessary for the conclusion of trades. Hence, trading ofcross-traded securities involves the transfer of securities bought on one tradingsystem to another trading system. The costs of such a cross-system transfer willalso be incorporated in the analysis of this study.