Dark Pool Caps to Test Traders, Not Systems


Once Markets in Financial Instruments Directive II goes into full effect in January 2017, European buy-side equities traders will face regulatory caps on dark pool execution similar to their American counterparts.

“The European Securities and Market Authority’s  caps are not identical to the ones in Regulation NMS, but they are pretty analogous,” said John Adam, global head of product strategy at trading-technology provider Portware, a unit of FactSet Research Systems.

European traders will need to update their trading strategies to reflect the larger displayed market, as their U.S. counterparts did in 2007.

“If my trading style has always heavily relied on dark pools and algorithms that use dark pools, those options may no longer be available,” Adam explained.

As a result, buy-side traders will need to re-think how they will need to execute block trades that may be several times larger than a stock’s average daily volume.

Adam suggested that asset managers might take this opportunity to start their year-end counterparty review and potentially perform a GAP analysis on the venues to which they have access.

When rolling out updated strategies, buy-side traders and portfolio managers also must be in tune with each other, according to Adam. “If traders have more challenges on the trading side, they will want to be sure that they are measuring everything they can and be in line with their manager’s goal,” he added.

Pre-trade, at-trade, and post-trade analytics will no longer be optional for the buy side.

“If I already have my transaction cost analysis (TCA) platform in place, fantastic,” said Adam. “I just need to make sure that my models account for limitations like not being able to get liquidity in the same place from one month to the next.”

For firms that might be starting TCA from scratch, it’s going to be more of a capital expenditure, he added.

Adam believes that most firms will not need to upgrades to their trading infrastructure much to meet the new trading environment brought on by Esma’s caps.

“Most tier-1 and tier-2 firms already have pretty industrial strength feeds and systems so that system performance is not an issue,” he said. “I don’t see that this will fragment the market further, but drive up quote volumes. It will be more throughput through the same pipes.”

Featured image via Shane Farnsworth/Lightstock

Related articles

  1. For buy-side firms, tech can streamline processes, reduce risk and costs, and improve CX.

  2. Daily Email Feature

    Equities Execution in Focus

    With Katherine Chairez, Head of Execution Strategy, Harris Associates 

  3. Daily Email Feature

    Trading Data on the Buy Side

    With Hubert De Jesus, Global Head of Market Structure and Electronic Trading, BlackRock 

  4. Assessing Bond Liquidity

    With Firas Hadj-Taieb, Global Co-Head of Quant Trading Strategy for GES, Nomura

  5. Buy-side veteran has been instrumental in building out a best-in-class trading analytics framework.