Non-Liquid Stocks Fail to Benefit From Fall In Block Size

Shanny Basar

New regulations in the European Union new regulations aimed to lower the threshold for large-in-scale trading in illiquid stocks but this benefit has not materialised according to an analysis by Fidessa.

MiFID II, the regulation which came into force in the EU on 3 January 2018, 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 orders and trading in auctions.

Christian Voigt, senior regulatory adviser at Fidessa, said in a blog that the large in scale (LIS) thresholds in MiFID II have decreased for shares with a low average daily turnover and are significantly higher for those with a high average daily turnover than under MiFID, which seems reasonable.

However, the European Securities and Markets Authority deems shares with a high average daily turnover to be liquid and those with a low turnover as as illiquid. Under MiFID II illiquid instruments can continue to trade in the dark without restrictions and outside the double volume cap.

“In other words, the LIS waiver is particularly significant for liquid instruments (for which the thresholds have increased),” added Voigt. “The reduction in the threshold that might benefit illiquid stocks is largely immaterial.”

He continued that MiFID II simply increases the minimum block size for many instruments.

“Understanding the intricacies of MiFID II is rather like peeling an onion – you peel enough layers and you’re bound to shed some tears,” said Voigt.

As a result, block trading will continue to gain in importance as the LIS waiver will be one of the few ways for trades in liquid stocks to avoid the double volume caps.

Fidessa’s Top of the Blocks report for the week ending 12 January 2018 showed record levels of LIS Block Trading.

Fidessa said Turquoise Plato, the London Stock Exchange Group venue operated withPlato Partnership’s buyside and sellside members, made the most gains.

The Association for Financial Markets in Europe said in its Equity Primary Markets and Trading Report for the fourth quarter of last year that the average weekly turnover of block trades on selected European venues increased in the run up to MiFID II.

AFME said the average weekly turnover of block trades on selected European venues rose from €2.5bn ($3.1bn) in the first quarter to last year to €3.9bn in the fourth quarter.

The MiFID II double volume caps calculations were due to be released on January 12 but this month Esma announced a delay to March.

The regulator said it had expected to receive data from trading venues for around 30,000 instruments in order to perform the double volume cap calculations but has only received complete data for approximately 650 instruments. In addition, these 650 instruments are relatively illiquid and have a limited amount of dark trading.

“Esma acknowledges that trading venues only had limited time to compute and submit all data as the relevant reporting period only closed on 31 December 2017 and the data had to reach Esma by close of business on 5 January 2018,” added the regulator.

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