20 January 2014

FN: Brokers unite to tackle caps on dark pool trading

MiFID II will cap the amount of trading that can be done in dark pools – trading venues that match stock orders without revealing price, size or the identity of a counterparty. According to those involved, This could limit dark pool volumes because many market participants prefer to trade in small size to control the impact they have on the market.

Andrew Bowley, head of business operations and risk at agency broker Instinet Europe, said: “Something brokers have discussed is how to deal with the dilemma of individual firms wanting to maximise their trading and grow their dark liquidity, versus a collective need to restrain it. One of the ways this could be done is through a minimum order size applied by the brokers to their dark orders.”

Christian Krohn, managing director at sellside trade organisation the Association for Financial Markets in Europe, said: “AFME and our members are exploring different options to look at the workability of the MiFID II regime on dark pools and minimise the potentially damaging impact that a blunt limit on dark trading may have. One option could be a minimum size for dark pool orders that increases incrementally as trading nears the threshold.”

Natan Tiefenbrun, managing director, European execution services at Bank of America Merrill Lynch, said a progressive raising of minimum trade sizes would seem to be “well aligned to policymakers’ stated goals regarding the purpose of dark trading”. He added: “This would result in more discriminating use of dark venues by apportioning dark capacity to the ‘most deserving’ trades, and would incentivise venues to guide behaviour in terms of functionality or pricing. Successful implementation will also depend on improving the quality of consolidated post-trade data, which needs to be a priority.”

MiFID II caps dark trading in a stock to 8 per cent of the volume traded in the EU and caps the volume on any one platform at 4 per cent of the total EU market in that stock. The mechanisms for applying the caps are to be decided.

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