Dark trading volumes reach highest level under MiFID II

An analysis from TABB Group has found dark trading volumes are the highest since MiFID II was introduced, despite summer slowdown.  

European equity trading activity fell in July this year while dark trading volumes surged to the highest level since MiFID II was introduced, according to analysis by TABB Group.

The research found that total average daily trading volumes for Europe’s equity markets during July declined 15% to €53 billion, but dark trading accounted for 9.6% of all on-exchange activity.

The increase reflects the largest market share for dark pools since April this year, where the venues accounted for 9.1% of activity. The highs in April have not been seen since October 2017, prior to the implementation of MiFID II, when dark pools accounted for 9.2% of activity.

Europe’s MiFID II regime introduced double volume caps (DVCs) in March 2018 following an initial delay to implementation, which have heavily affected trading volumes in dark pools in Europe. The DVCs trigger bans on dark trading when a transaction accounts for 4% of the total activity on a single dark venue, or 8% of total trading market-wide. Dark trading has steadily increased since the first set of DVCs expired in September 2018, despite early and dramatic declines following the introduction of MiFID II.

“As of August 8, 2019, a total of 267 instruments are suspended from dark trading. There has been a steady fall in the number of stocks that are subject to the caps, reflecting the impact the early 2018 caps have had on dark trading volumes and the 12-month retrospective calculation,” said Tim Cave, TABB Group analyst and author of the research.

At the same time, volumes in periodic auctions have fallen as the number of securities capped by the dark trading rules decreased. According to the analysis, periodic auction market share accounted for 2.3% of on-exchange activity in July, compared to the highs seen in August last year of 2.9%.

Periodic auctions, seen by many as a MiFID II-compliant alternative to dark pools, witnessed a surge in activity as the DVCs came into force which resulted in regulatory scrutiny amid fears firms were using them to evade the dark trading restrictions.

Trading on systematic internalisers (SIs) also fell in July this year, driven by decreased activity in above the large-in-scale (LIS) threshold activity. Addressable daily notional SI volumes fell to €8.3 billion in July, compared to €10.5 billion the month prior. But market participants are seemingly warming to SIs, as addressable volume has increased from 13% of total volumes in January this year, to 15% in July.

SI activity below the LIS threshold in July was mainly driven by electronic liquidity providers (ELPs). ELP SIs accounted for 41% of addressable SI activity below the LIS threshold, 14% of total addressable SI activity, and 2.2% of overall market volumes. TABB Group stated SI venues have emerged as a critical liquidity source for market participants.

“The question for many brokers and buy-side firms no longer is “why” they should execute against ELP SI liquidity, but rather “which” firms should they execute against. Each ELP SI pursues different strategies, and the focus for many brokers and buy-side firms in recent months has been understanding these differences,” Cave added.