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Europe Readies For Dark-Pool Caps
Traders Magazine Online News, March 21, 2018
The European market is preparing for the suspension of trading in dark pools for some stocks from the start of next week, with the largest number of stocks affected being UK names.
In order to encourage trading on lit venues, MiFID II places double volume caps of trading in dark pools of 4% of the total volume over the previous twelve months on a single venue and 8% across all EU trading venues. There are waivers for large-in-scale (LIS) orders and trading in auctions which has led to a boost in volumes of block trades and periodic auctions.
The European Securities and Markets Authority published its calculations on the double volume caps on 7 March, with six-month suspensions going into force on Monday 12 March.
Esma said a statement: “The purpose of the double volume cap mechanism is to limit the amount of trading under certain equity waivers to ensure the use of such waivers does not harm price formation for equity instruments. More specifically, the DVC limits the amount of dark trading under the reference price waiver and the negotiated transaction waiver.”
The calculations had been due to be published in January 2018, but Esma delayed the implementation until this month due to issues over the quality and completeness of the data it had gathered.
Christian Voigt, senior regulatory adviser at Fidessa, said in a blog that combining the statistics for January and February leads to a total of 755 securities being capped due to either the 4% or 8% thresholds, including 685 ISINs deemed liquid by Esma.
“Whilst that is just 2.5% of all equities that ESMA lists in its transparency calculations, it represents a whopping 35% of all the liquid instruments listed, where the DVC matters more,” he added.
Duncan Higgins, head of electronic products at ITG said in an email: “Crucially, 85 UK blue chips of 101 stocks in the FTSE 100 will hit the 8% cap. Judging by the information from Esma, German index names appear to be the least affected of all the stocks in Europe.”
He continued that the capped stocks which have the highest amount of trading activity across Europe include UK names such as HSBC, AstraZeneca and Vodafone.
“Implementation of the caps puts live the final set of market changes we prepared for last year,” added Higgs. “When the caps were delayed we pressed ahead anyway.”
ITG changed the minimum threshold for POSIT Alert to large in scale and changed algorithms to prioritise blocks and periodic auction liquidity. He said: “Because of those earlier changes the cap go-live will be less impactful to clients using our trading tools.”
Rebecca Healey, head of market structure at Liquidnet EMEA, told Markets Media: "The impact of the double volume caps may be less significant than first feared. Less than 5% of the total number of marketwide instruments will be affected, although some of indices such as the FTSE 100 will be harder hit."
Healey noted in a blog that for Germany’s DAX 30, only one instrument will be capped and for France’s CAC 40, six stocks will be affected.
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