As the approach of the new MiFID II regulations are about to grab hold, ITG has released a new paper examining the effects on the European equities trading market.
ITG’s Alistair Cree and Colleen Ruane wrote about the about the likely impact of the MiFID II dark pool caps on various algorithmic trading strategies in the recently released “MiFID 2: Impact of Dark Caps on Algorithmic Trading Strategies” report. The report begins by stating that dark trading in Europe is expected to be fundamentally altered by the implementation of MiFID II/ MiFIR. The proposed cap on dark pool volumes will require all institutional investors to reevaluate how they interact with dark liquidity, but for some the impact of the changes will be greater than for others.
The paper analyzed 9 million algorithmic trades in Europe across a wide range of brokers, order sizes and execution venues.
According to Cree and Ruane, approximately 18% of orders executed using dark algorithms resulted in trade sizes which were large enough to qualify for the Large-in-Scale (LIS) waiver (i.e. they wouldn’t count under the 4%/8% dark pool caps, and these trades could still be executed even if caps had been triggered already in a particular stock).
Also, they noted that very large order sizes, 10 times greater than the LIS waiver thresholds, resulted in trades which met the LIS minimums 38% of the time.
ITG explained that as is currently understood, dark trading regulated by MiFID II/MiFIR will differ from the present regime in three significant ways. Firstly, the closure of Broker Crossing Networks (BCNs) will limit brokers’ capacity to cross client order flow internally. Secondly, dark pool trading on MTFs will be limited to execution at the midpoint only. Finally, caps will be implemented on the volume trading both on any individual venue at 4% of market volume and on the market as a whole at 8% of market volume. ESMA will calculate the dark volumes for each venue and the market as a whole on a stock-specific basis over a rolling 12 month window. In the event that ESMA determines that the cap has been breached, dark trading for that security will be suspended for the next 6 months, either in the specific pool or for all dark pools. i In this paper we focus on the potential effects of such a suspension of all dark trading for a security.
