European Dark Pools Brace for Continent-Wide Limits on TradingBy and
Dark-pool trades will stop for six months if caps are breached
Regulators had worried public markets were being harmed
The European Union is going ahead with new regulations that could stop many of the continent’s largest companies from trading on dark pools, even though a senior lawmaker has denounced the rules as unworkable and exchanges have said they will impact trading in unpredictable ways.
The European Securities and Markets Authority made one concession to its critics when it published the final version of the rules on Monday. The EU’s markets regulator changed an existing exemption to the trading limits, so that stakes in thinly traded companies can more easily change hands on dark pools once the new rules come into force in January 2017.
The exemption -- called the large-in-scale waiver -- allows stakes to trade on dark pools without restriction. Both regulators and market operators want to ensure that investors can trade stakes in companies without share prices moving against them. Some venues criticized ESMA for not reducing the block-trading threshold for the most-traded stocks, which are also the continent’s biggest companies.
“All the fundamental problems still remain,” said Steve Grob, global director of group strategy at Fidessa Group Plc. “There’s a huge middle ground where you’ve got something that’s a very large block that you would never send to a lit market, so what happens to that liquidity?”
Europe is imposing limits out of concern that the rise of dark pools -- whose order books are kept secret -- is making prices on public exchanges less accurate. Large investors favor them because they can find privacy to trade big blocks of shares, in theory getting better prices because it’s tougher to sniff out their strategies in the dark.
“The thresholds are still too large, particularly for large-cap stocks,” said Rob Boardman, chief executive officer for Europe of Investment Technology Group Inc., which operates a dark pool. “If you try to send an order in these sizes to the lit market, you could have significant market impact.”
Under the rules, private stock-trading platforms won’t be able to trade a given company’s stock for six months if a total of 8 percent of its volume is traded on dark pools during the previous 12 months. Additionally, any dark pool that handles 4 percent of a given stock for a year will then be stopped from trading it for six months.
The number of trading venues for European stocks surged after the EU overhauled its rules in 2007 to break the exchanges’ monopoly over share trading. The dark-pool caps are part of a broader regulatory package called MiFID II. The overhaul has many aims, including making markets safer in the aftermath of the 2008 financial crisis.
ESMA opted to go ahead with the limits on dark-pool trading, even after a leading member of the European Parliament said earlier this year that “the double volume cap will not function.” Markus Ferber is the lawmaker responsible for overseeing work on the new rules. The European Parliament has to approve ESMA’s regulations for them to take effect at the start of January 2017.
London Stock Exchange Group Plc has also criticized the caps. LSE research -- based on data from 2014 -- shows that dark-pool trading would become impossible for almost all of the U.K.’s 100 largest listed companies when the new system comes into force, Brian Schwieger, head of equities at the stock-exchange operator, said in April.
As part of the final rules, ESMA confirmed that it would collect share-trading data from each venue twice a month and then combine the dark-pool trades to determine whether to stop dark trading.
The European Commission, the parliament and the European Council all have the ability to reject parts of MiFID II. If they don’t, the rules drafted by ESMA will come into force at the beginning of 2017.
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