10.03.2018
By Shanny Basar

Euronext, Turquoise Boost Block Competition

Euronext has added 25 new stocks from the London Stock Exchange’s small and mid-cap market to its block trading venue. Last month Turquoise, the LSE Group’s pan-European multilateral trading facility, said Euronext Growth stocks were available to trade on its platform.

Volumes of electronic block trading in the European Union have been boosted by MiFID II going live in the region at the start of this year. The regulation aimed to encourage trading on lit venues by introducing double volume caps on trading in dark pools. However, large-in-scale trading above a specified size has a waiver and the market share for electronic blocks has grown.

As a result Euronext Block also added 30 new shares, primarily small and mid-cap stocks, for trading in August. Veronica Taylor, head of Euronext Block, said last month that France digital services company Aubay, a mid-cap stock, reached a trading record:

In the UK Turquoise said the addition of Euronext growth stocks expanded the platform’s universe of approximately 4,500 stocks across 19 major European markets. It follows the addition of AIM UK 50 stocks to Turquoise in October last year.

Robert Barnes, chief executive of  Turquoise, said in a statement: “Further extending Turquoise’s universe of European stocks to incorporate Euronext Growth instruments gives our customers increased access to high-growth European small and medium-sized enterprises.”

MiFID II not changing trading behavior

Although MiFID II aimed to shift trading to lit venues, investors are reverting back to the same trading behaviour as before the regulation went live according to Christian Voigt, senior regulatory adviser at Fidessa.

Voigt said in a blog that when the delayed double volume caps first went live on 12 March, the volume of dark turnover in Europe fell by nearly half as hundreds of shares were suspended from trading for six months.

“After a six-month mandatory break all of the suspended stocks have now been allowed to re-join the general population,” Voigt added. “Early evidence suggests that overall dark trading has now resumed at roughly pre-suspension levels.”

He continued that Fidessa’s latest Top of the Blocks report shows this resumption is not down to block trades, suggesting that there is a preference for trading these newly released stocks in the dark below the LIS threshold.

“With investors apparently reverting to their previous trading behaviour, is the double volume cap simply serving to narrow the window of time in which they can get their preferred smaller dark trades done before the next suspensions kick in?,” said Voigt.

Tim Cave, analyst at consultant Tabb Group, said in a report that since the first six-month suspensions for 624 stocks under the double volume caps were lifted on September 12, dark MTF volume has surged at the expense of periodic auctions.

Cave added that in the first seven trading days of September, average notional was €2.4bn ($2.8bn) on dark MTFs, while in the six days after September 12 it was €3.4bn – the increase almost exclusively from trades below LIS. Over the same period, volumes on periodic auctions fell from €1.4bn to €1bn.

“Interestingly, lit volumes also fell during this period, from €30.4bn to €29.7bn,” Cave added. “This all suggests the dark pool caps are not permanently changing behaviours just yet.”

Esma review

Steven Maijoor, chair of the European Securities and Markets Authority, spoke about the double volume caps in a speech today.

Maijoor said that Esma’s observations, after more than six months of applying the caps, show that trading flow previously executed under waivers is flowing to systematic internalisers and periodic auction trading systems, as well as an increase in block size transactions.

As a result, these developments have triggered concerns that some periodic auction systems may be designed with the intention to circumvent the double volume cap regime.

“Therefore, we have carried out a fact-finding exercise on periodic auction trading systems in recent months to fully understand their various features,” he added. “We intend to publish, in the coming months, a call for evidence on this issue to gather further insights from stakeholders before concluding our analysis and considering whether further Esma measures or recommendations are needed for those new types of trading systems.”

Systematic internalisers

Maijoor also noted that systematic internalisers appear to be enjoying a significant increase in market share. MiFID II banned broker crossing networks and required firms to set up systematic internalisers to provide risk capital that facilitates trades. SIs have extra obligations such as trade reporting.

There have been concerns that SIs have unfair advantages over trading venues and this will result in changes in the market structure away from lit venues. For example, in the original MiFID II text SIs were not subject to the tick size regime applicable to trading venues in the EU for equity instruments, allowing them to offer marginally better prices than trading venues.

He continued: “Esma, as an early corrective measure, in March this year submitted a proposal to the Commission to ensure that quotes of systematic internalisers which are subject to pre-trade transparency meet the tick size requirements. The Commission is now in the process of endorsing this proposal, albeit for a slightly narrower scope of instruments, thereby further aligning the regulatory requirements applicable to SIs and trading venues. We are hoping that this necessary amendment will make it into law very soon.”

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