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The rules are fuelling fears that buyside firms will withdraw from investments in the sector. The rules will ban a stock from dark pools if the proportion of total trade done in these venues exceeds 8%, or 4% in any individual dark pool, on a rolling 12-month basis. The results from mid-caps have caused most concern, with the study indicating 26% would have breached the limit and been banned from dark pools.
Mark Hemsley, chief executive of Bats Chi-X Europe, which runs both dark and lit venues, said for small and mid-cap stocks “there is a risk liquidity will decrease and some investors could be in the situation where it will be even more difficult to trade in small or mid-caps. It is not a given that dark trading in these equities will move back to lit exchanges as some regulators envisage.”
Mark Goodman, head of quantitative electronic services for Europe at Société Générale, said: “When fund managers pick stocks to trade, they will generally look at the liquidity of the stocks to understand whether they will give away all their gains upon exiting a position. If you can only exit a position on a lit venue, you will have a much greater impact on the market than you would in a dark pool, which will deter investors from taking these stocks into their portfolios.”
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