A Longitudinal PLS-SEM Analysis of Regulatory Impact on Transaction Costs and Market Competitiveness in European Financial Markets

Abstract

Aims: This study examines how the implementation of MiFID II and MiFIR has impacted transaction costs, infrastructure operations, and competitive dynamics within European financial market infrastructures. Grounded in Transaction Cost Economics (TCE), the research explores how institutional and operational changes affect cost structures and strategic positioning. Study Design: A longitudinal multigroup Partial Least Squares Structural Equation Model (PLS-SEM) is applied to compare the relationships between infrastructure transactions, market economics, infrastructure operations and transaction costs in two distinct timeframes: pre- and post-MiFID II enforcement. Place and Duration of Study: The study is based on anonymized data from European financial market operators and industry sources, covering the period from 2012 to 2023. Methodology: Using SmartPLS 4.1.0.8, the model analyzes 120 observations across 31 financial and operational indicators. All variables were log-transformed – natural logarithm (LN) – to ensure statistical consistency. A 5,000-sample bootstrapping procedure and permutation-based multigroup analysis were used to evaluate the significance of structural paths and test for regulatory effects. Results:  Before MiFID II, transaction costs were primarily driven by trading volume, with infrastructure operations showing minimal influence. After MiFID II, the dominant driver shifted: infrastructure operations became the main factor influencing transaction costs, while the impact of trading activity weakened. The explanatory power of the model remained high across both periods (R² Transaction Costs: 0.960 → 0.990). Hypotheses H1 and H2 were statistically preliminary supported, while H3, H4, and H5 showed no significance in the post-regulatory (MiFID II) period. Conclusion: MiFID II significantly altered the cost dynamics of financial market infrastructures. Regulatory compliance and operational complexity now play a larger role in shaping transaction costs, suggesting a shift from volume-driven to structure-driven cost models. These findings contribute to Transaction Cost Economics and offer valuable implications for a better understanding of financial markets and contributes to the domain of science.