EU Awaits Dark Volume Caps

Shanny Basar

The delayed double volume caps on trading in dark pools are due to come into force this month after new regulations have not yet boosted transactions on lit venues.

Rebecca Healey, head of market structure and strategy EMEA at institutional trading network Liquidnet, tweeted:

One of the aims of MiFID II, the regulation which came into force in the European Union on 3 January, is to boost trading on lit venues. Andrew Bailey, chief executive of the Financial Conduct Authority, said in a speech this morning: “An important part of this objective is to migrate significant volumes of trading from over-the-counter (OTC) markets towards more transparent trading venues.”

MiFID II places volume caps on trading of 4% of daily volume in an individual stock on any single dark venue as well as 8% of total average daily volume across all European dark pools. There are waivers for large-in-scale (LIS) orders and trading in auctions which led to a boost in volumes of block trades and periodic auctions. However the calculation for the caps were meant to be published last month by the European Securities and Markets Authority.

Bailey continued that it is still very early days for MiFID II but the new systems have successfully accommodated heavy trading as market volatility spiked last month. There has also been an expected pronounced downturn in OTC equity trading.


“There have been delays in introducing some of the planned measures, notably the double volume cap which limits dark trading,” he added. “I have no doubt that across the EU, the data systems will get up to speed and enable this to happen and I am relaxed that it will happen robustly without disrupting markets. Esma has said it will happen in March.”

Healey told Liquidnet members in a presentation in the first month after MiFID II went live that volumes of trading in lit venues were unchanged at 57% of the total market. She said: “In general, we have not seen the big shift to lit trading the regulators were hoping for. The question is whether there will be a shift in the landscape once the caps are implemented.”

However the waivers from the dark caps have led to  an increase in volumes in auctions and in large blocks. For example, Cboe Europe Equities said that during the first month of MiFID II, the exchange had record volumes for both periodic auctions and LIS trading.

MiFID II also prohibits broker crossing networks. Systematic internalisers were originally set up for equities under the MiFID regulations in 2007 for all off-venue trading in the European Union. However only nine banks became SIs and very few trades took place on the back of an SI quote as off-venue trading moved to broker crossing networks. As a result MiFID II has extended SIs to other asset classes in order to capture OTC trading activity and increase transparency.

Christian Voigt, senior regulatory adviser at Fidessa, said in a blog that there are currently about 109 SIs in varying states of registration in Europe, compared to less than 20  before MiFID II came into force.

There are the most SIs for bonds, 59, followed by 53 for derivatives and 47 for equities.

“Designed with equities in mind, SIs appear to be conquering other asset classes too with more of them active in bonds and derivatives,” added Voigt. “Who would have thought it?”

Steve Grob, director of group strategy at Fidessa, said in an email last month that that there is a lack of transparency in SI reporting.

“This cannot be broken down any further, however, and so volume that was previously lumped into the OTC category is just now in a similarly opaque bucket called SI,” added Grob. “What will be interesting, though, is how the SI volume grows as new electronic market makers enter the SI space.”

For example, this week Fidessa said it will partner with Virtu to connect clients to the liquidity of Virtu SI. The electronic market maker’s customisable SI price feeds are integrated to Fidessa’s smart router and market access so they can be consumed as if they are additional venues alongside traditional sources of liquidity. In addition, Fidessa’s order handling enables users to manage order flow across all the venues that have emerged under MiFID II.

James Blackburn, global head of equities product marketing at Fidessa, said in a statement: “MiFID II is reshaping the liquidity landscape as trading migrates to more transparent and disclosed SIs and away from broker crossing networks and dark pools. At the same time, the focus on best execution has never been greater and now extends formally to the buyside as well.”

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