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The debate in Brussels centres on how to address the growing popularity among institutional investors of off-exchange venues, which include bank-owned broker crossing networks, bloc trading venues and venues run by alternative exchanges. Champions of the venues argue that dark pools allow buyers and sellers to trade without moving the market – orders are not disclosed and deals only reported once completed. Critics say the lack of public information on trades, as volumes grow, makes price discovery harder.
Dark pools in Europe are allowed to trade via a series of waivers. The exchanges, for their part, would prefer one of the most popular waivers for dark pools, based on reference price, to be scrapped, particularly as the size of orders executed in dark pools continues to fall. At present, a dark pool can operate if it shows to regulators that its prices are close to those on exchanges.
Critics, though, say keeping the waiver benefits only big pension funds, who get the best prices in dark pools because of the relatively large size of their orders The Federation of European Stock Exchanges, a trade association, says this particular waiver “decreases transparency and undermines the price discovery process on lit [exchange] markets". Investors, it argues, have no way of knowing if they are getting the best prices.
The Council of Ministers is proposing to cap the amount of trading that can take place away from exchanges at four per cent per venue, and 8 per cent of the total market. Many market participants have branded this proposal as “unworkable”, pointing out that once a venue has breached the threshold, its trading activity would cease. Some pension funds would benefit, but others would lose out.
With Commission officials and lawmakers keen to finalise their review by the end of January, Michel Barnier, European Commissioner for financial services, has written to the European Parliament stressing the importance of transparency in the MiFID negotiations. The Commission has been asked to produce a paper that finds common ground between lawmakers. That promises to be a tough challenge.
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