The first trading day under MiFID II may have been relatively subdued, but the law’s limits on dark pools, which aren’t due to kick in until next week, may prove more disruptive.
“The real story of MiFID has yet to play out,” said David Howson, chief operating officer of Cboe Global Markets Inc.’s European business, which runs the continent’s biggest dark market. “There has been no step change yet in equity markets.”
Most fund managers and traders will be forced to modify or redirect where and how they trade stocks when MiFID II’s dark-pool limits take effect on Friday, Jan. 12, the European Securities and Markets Authority said in an email. The rules that cap how much volume can be traded in dark pools will cover a massive chunk of European equities — Rosenblatt Securities Inc. estimates 72 percent of stocks in the region will be affected by the caps, based on data compiled in late December.
There was some confusion about the exact date the limits would kick in, with some companies saying they would follow regulators’ lead.
Cboe’s Howson says the company is ready, and plans to reject dark trades in the affected stocks from 7 a.m. next Friday. London Stock Exchange Group Plc’s dark pool, called Turquoise, says it’s also prepared. The unit’s Chief Executive Officer Robert Barnes said that, per the rules, it will start rejecting dark orders two days after ESMA publishes the list of stocks that have breached the dark-trading limits.
Only 8 percent of overall trading volumes in each stock over the previous 12 months can take place on dark venues, and each individual dark venue can only handle 4 percent of overall volumes. Stocks that have breached the limits over the last 12 months will be banned from trading in the dark from next Friday.
Dark pools are so called because they offer a hiding spot for big buy and sell orders, which protects investors from tipping their hand to the market. Traders who want to continue trading in the dark will have three options: trade massive blocks that qualify for an exemption from the ban, use a new breed of venues called systematic internalizers or send orders to periodic auctions that hide them until there is enough volume to trigger a trade.
The Dark. And the Lit
European equities traded in the dark, % of overall trading
Source: Rosenblatt Securities Inc.
About 10 percent of European stocks were traded on dark venues in the final months of 2017, indicating that fund managers have left it to the last moment before changing their trading habits. There are, however, signs that investors are beginning to move business to the new ways of trading. Cboe Europe said on Thursday that it saw a fivefold increase in trading on its periodic-auction service on MiFID’s first day, compared with December’s average daily volume.
Europe’s dark pools sent their volume data to ESMA on Wednesday. The European Union’s markets regulator will name which stocks are banned on Jan. 9, and venues across the EU will have to enforce the ban two days later. The ban takes effect an hour before equity markets open to stop the off-exchange block trades that commonly take place between 7 a.m. and 8 a.m.
— With assistance by William Canny
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