A volume cap on dark trading put forward in the latest proposals for MiFID II and its attendant regulation from the Irish Presidency will reduce dark activity in European equity markets and result in greater fragmentation, according to market structure consultant.
The proposed rules – published this week by the Irish Presidency of the Council of the European Union – outline a volume cap applied to trading venues using the reference price waiver and an overall cap that would see use of these waivers halted across the European Union.
Rebecca Healey, senior analyst at TABB Group, today warned these proposed rules would have a “draconian effect on dark trading in Europe” and warned market participants may have to overhaul dark trading practices, including significant technological changes.
“Regulators are preparing to drive a stake in European cash markets in the form of a volume cap on dark trading,” Healey wrote. “Without the sanctity of the dark, achieving effective execution will require increased technology, leading to a two-tier system open to only those who can afford to play and creating yet more fragmentation.”
New rules governing broker crossing networks (BCNs) in MiFID II will also limit dark trading in the region. BCNs will no longer be able to mix proprietary and customer orders and will instead have to become systematic internalisers or multilateral trading facilities.
In the research note, Healey warns that the rules will also see further growth in electronic trading across asset classes at the expense of voice broked trades.
“It is clear that European politicians intend the equity model to be used as the base model for all instrument types, regardless of their suitability,” she wrote. “This will inevitably lead to an increase in automated flow accelerating the demise of voice trading across all asset classes. This is no longer the sole domain of equities.”
MiFID II is expected to come into force in 2015 at the earliest, but many have warned that recent delays at European political level may push this back to 2016. The Council is nearing a final position on the directive and regulation, which may be finalised in a June meeting. Once established, the Council will negotiate a final text with the European Parliament with input from the Commission.