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Rosenblatt Report Says Widespread Dark Trading Bans Likely Under MIFID II Caps
Traders Magazine Online News, July 13, 2017
Come January 1, traders are likely to find that massive numbers of European stocks will be banned from the most-popular methods of dark trading. That’s the conclusion of a new Rosenblatt Securities report analyzing the potential impact of dark-pool regulations set to go live next year as part of revisions to the European Union’s Markets in Financial Instruments Directive.
The report, titled “Shedding Light on MiFID II’s Dark Volume Caps,” takes an in-depth look at how the new rules could affect trading in 757 stocks across 18 major European indexes. Bats Europe, a CBOE Holdings, Inc. company and the region’s largest equities exchange operator, provided the data for the report.
The double volume-cap rules trigger bans on certain types of dark trading when such transactions account for 4% of the total activity (over the past 12 months) in that security on an individual dark venue, or 8% of total trading in that stock market-wide. Securities breaching the 4% venue-specific cap are subject to a 6-month ban on the venue in question. Issues exceeding the 8% market-wide cap trigger a 6-month dark-trading ban market-wide.
Key findings from the report include:
- Nearly three-quarters of all stocks measured breached the 8% market-wide cap
- UK and Irish stocks were heavily affected — 89% of FTSE 100 and FTSE 250 stocks, and 85% of Ireland’s ISEQ 20 constituents, exceeded the 8% cap
- Less-liquid issues are likely to suffer disproportionately under the caps: 83% of mid-cap index constituents breached the 8% threshold, compared with 67% of large-cap index constituents
- Individual dark pools surpassed 4% of total volume in a security 394 times, but there were only two instances in which an issue that did not trigger the 8% threshold breached the 4% cap
“The dark volume caps are probably the most consequential aspect of MiFID II for equity traders on day one, but there’s been very little visibility into how impactful they’ll be,” said Justin Schack, a Managing Director and Partner at Rosenblatt who heads the firm’s market-structure group. “We hope this report will illuminate things for institutional investors, as well as other market participants.”
“It’s particularly notable that the caps appear likely to disproportionately affect less-liquid stocks,” said Anish Puaar, Vice President and European Market Structure Analyst at Rosenblatt, who authored the report. “These names are already difficult to trade, which makes dark pools an appealing alternative for buy-side traders seeking to minimize information leakage and market impact. It will be interesting to see how restrictions on trading these stocks in the dark affect investor outcomes under MiFID II.”
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