Requirements for large-in-scale waivers for dark trading should be reduced to help counter the potential impact of dark pool caps on block trading, according to panelists at the FIX EMEA Conference in London.
MiFID II is set to introduce several restrictions on trading in dark pools, including venue and Europe-wide caps and limits to the use of the reference price waiver, which allows firms to avoid pre-trade price transparency under certain conditions.
The large-in-scale waiver also enables firms to avoid pre-trade transparency rules for block trades. Currently, the conditions for using the waiver vary based on normal trading volumes for a share, between 1% of turnover for orders where average daily turnover in a stock is more than €50 million to 10% for orders with a turnover of €500,000.
While MiFID II does not propose making any changes to the rules for the large-in-scale waiver, industry participants believe the thresholds should be reduced.
Speaking at the FIX conference, Rob Boardman, CEO of agency broker ITG Europe, said: “We would welcome an adjustment to the large-in-scale waiver but I think political issues will get in the way of this. The direction of travel in Brussels is towards reducing the amount of trading taking place in the dark and lowering the large-in-scale threshold would go against that.”
One of the key concerns among legislators is that too many small trades that would have taken place on lit exchanges prior to the introduction of on-exchange dark trading in the first MiFID, were now being done in the dark with little justification. Boardman suggested that block trading is still seen as an acceptable use of pre-trade transparency waivers and thus should be encouraged with a lower threshold.
Also speaking on the panel was Brian Schwieger, head of equities at the London Stock Exchange, who said that such a move would be welcomed, as large-in-scale waivers are currently underused. However, he agreed with Boardman that the current political climate in Brussels makes it highly unlikely it will feature in the final MiFID text.
Boardman also highlighted an issue exchanges will face in the coming years as they seek to provide more distinctions between different types of dark trades.
“Dark pool operators are going to need to review and reengineer the way they print trades, so they can utilise both the reference price waiver and large-in-scale waiver.”
Schwieger agreed exchanges will likely need to change their systems once greater detail about how both caps and waivers will be handled is published by the EU.